GBP/USD Forecast: Pound Sterling remains fragile after UK inflation data
- GBP/USD stays in negative territory near 1.2700 on Wednesday.
- Annual CPI inflation in the UK softened to 3.4% in February.
- The Federal Reserve will announce its interest rate decision and publish the dot plot.
GBP/USD trades in negative territory near 1.2700 in the European session on Wednesday as markets assess inflation data from the UK. The near-term technical outlook points to a buildup of bearish momentum as market focus shifts to the Federal Reserve's (Fed) policy announcements.
The data published by the UK's Office for National Statistics (ONS) showed on Wednesday that inflation, as measured by the change in the Consumer Price Index (CPI), declined to 3.4% on a yearly basis in February from 4% in January. This reading was the lowest since September 2021 and it came in below the market expectation of 3.6%. The ONS further reported that the Core CPI was up 4.5% in the same period, compared to 5.1% in January and analysts' estimate of 4.6%.
The rate-sensitive 2-year UK government bond yield lost nearly 2% and dropped below 4.2% after inflation data. "Investors slightly increased bets that the Bank of England will start cutting interest rates in August," Reuters reported.
Later in the day, the Fed is set to hold the policy rate unchanged at 5.25%-5.5%. The revised Summary of Economic Projections (SEP), also known as the dot plot, could provide important clues regarding the timing of the policy pivot and the rate outlook.
In December, the SEP showed that policymakers were forecasting a total of 75 basis points (bps) reduction in the policy rate in 2024. Strong inflation and employment data since the beginning of the year caused investors to refrain from pricing in a rate cut until June.
In case the dot plot shows that officials still favor a 75 bps reduction this year, the initial market reaction could feed into expectations for a rate cut in June and cause US Treasury bond yield to turn south and weigh on the USD. If policymakers prefer 50 bps rate reduction this year, this could be seen as a hawkish tilt in the outlook and provide a boost to the USD, forcing GBP/USD to stay on the back foot in the American session.
GBP/USD Technical Analysis
The Relative Strength Index (RSI) on the 4-hour chart declined below 40 in the European session on Wednesday and the 20-period Simple Moving Average (SMA) completed a bearish cross with the 100-period SMA.
On the downside, 1.2670 (Fibonacci 61.8% retracement of the latest uptrend, 200-period SMA) aligns as first support before 1.2620 (Fibonacci 61.8% retracement) and 1.2600 (static level). Immediate resistance is located at 1.2710 (Fibonacci 50% retracement) ahead of 1.2730 (100-period SMA, descending trend line) and 1.2750 (Fibonacci 38.2% retracement).
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
