- The Pound Sterling corrected from seven-month highs against the US Dollar.
- GBP/USD is likely to take further cues from the upcoming Fed and BoE policy announcements.
- GBP/USD needs to defend strong support near 1.2700 to negate the recent bearish bias.
The Pound Sterling (GBP) gave into the US Dollar (USD) resurgence, as GBP/USD registered a sharp correction from seven-month highs of 1.2894 reached a week ago.
Pound Sterling suffers on renewed USD demand
The US Dollar jumped back on the bids, mainly underpinned by less dovish US Federal Reserve (Fed) policy expectations. Traders pared bets for a June interest rate cut by the Fed following the release of the inflation data from the United States (US).
Data on Tuesday showed that the US Consumer Price Index (CPI) rose 3.2% in February from a year ago, beating the market forecast of 3.1%. The monthly CPI increased 0.4% in the same period. Core CPI, which excludes food and energy prices, increased 0.4% from the last month and 3.8% over the year.
Meanwhile, the US Producer Price Index (PPI) report released on Thursday showed an increase of 0.6% MoM in February, up sharply from 0.3% in January while beating the market estimate of 0.3%. The reading was the highest rate since August 2023. The PPI increased at an annual rate of 1.6%, up from a revised 0.9% in January. The PPI, which measures price changes at factory gates, is widely considered a leading indicator for consumer inflation as producers tend to pass on price increases to customers.
Markets ignored a weak US Retail Sales report, as hot PPI inflation data drove the sentiment around the US Dollar. Traders now see odds of a June Fed rate cut at 62%, down from about 75% a week ago, according to the CME Group’s FedWatch Tool.
The revival of the buying interest in the US Dollar added extra legs to the GBP/USD correction, as the pair tested weekly lows just above the 1.2700 level.
A weak UK labor market report also contributed to the pullback in the Cable. The UK ILO Unemployment Rate rose to 3.9% in three months to January, a tad higher than the 3.8% in December, data published by the Office for National Statistics (ONS) showed Tuesday. Average Earnings excluding Bonus, a measure of wage inflation, rose 6.1% 3M YoY in January versus December’s 6.2% increase, below the expected 6.2% raise. The UK pay growth was at its slowest pace since October 2022, which prompted markets to ramp up bets on a BoE rate cut in June, although one is not fully priced until August.
On Tuesday, a mixed message from the Bank of England (BoE) Governor Andrew Bailey also failed to support the Pound Sterling. Bailey said inflation expectations seemed to be under control and worries about a price-wage spiral were easing. He added that problems with labor market data and geopolitical risks left him unsure about the jobless rate, per Reuters.
The Consumer Sentiment Index in the US edged slightly lower to 76.5 in March from 76.9, the University of Michigan reported on Friday. This data, however, failed to trigger a noticeable market reaction and allowed GBP/USD to remain within its daily range below 1.2800 heading into the weekend.
Fed and BoE policy announcements in the spotlight
Heading into a big week, Pound Sterling traders gear up for some volatility, with the BoE and the Fed policy decisions.
Any hints on the timing and the scope of interest rate cuts from both central banks will trigger a big reaction in the GBP/USD pair, as an extended pause is fully baked in.
Also in focus will be the UK CPI inflation report due on Wednesday, while preliminary business PMIs from both sides of the Atlantic will be featured on Thursday.
Friday will see the release of the UK Retail Sales data and the return of Fed policymakers after the “blackout period”.
GBP/USD: Technical Outlook
As observed on the daily chart, GBP/USD is falling toward the rising channel support at 1.2655 after facing rejection at the channel upside barrier, back then at 1.2890.
The Pound Sterling needs to defend strong support near 1.2700 to negate the ongoing bearish momentum. That level is where the 21- and 50-day Simple Moving Averages (SMA) close in.
If a failure to do so, sellers will regain control and extend the downtrend to the abovementioned channel support at 1.2655.
A sustained break of that level will trigger a fresh drop toward the 100-day SMA at 1.2614, with the next critical cushion seen at the 200-day SMA at 1.2592.
However, the 14-day Relative Strength Index (RSI) still holds above the midline, despite this week’s decline. This suggests that GBP/USD could see some bargain-hunting demand on every move lower.
Adding credence to the bullish potential, a couple of Bull Cross remains in play.
If buyers manage to stage a comeback, GBP/USD could meet the first topside hurdle near 1.2820, above which a fresh advance toward the 1.2900 level will be in the offing.
Further up, the pair would then target the 1.3000 psychological level.
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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