British Pound gains traction above 1.3400 as softer US CPI dampens Fed rate hike expectations

GBP/USD drifts higher to around 1.3405 in Wednesday’s early Asian session.
Cool US CPI inflation data reduces Fed rate hike expectations, weighing on the US Dollar.
Fed’s Warsh said slowing inflation in June doesn’t mean it’s mission accomplished.

Lallalit Srijandorn FXStreet

The GBP/USD pair gains ground to near 1.3405 during the early Asian session on Wednesday. The US dollar (USD) weakens against the British Pound (GBP) as softer-than-expected US inflation in June tempered expectations for US Federal Reserve (Fed) policy tightening. The release of the US June Producer Price Index (PPI) report will be in the spotlight later in the day.

US inflation slowed more than expected in June, with the US Consumer Price Index (CPI) rising by 3.5% YoY in June, compared to 4.2% in May, the US Bureau of Labor Statistics (BLS) showed on Tuesday. This figure came in cooler than the expectation of 3.8%. On a monthly basis, the headline CPI declined by 0.4% in June, versus a rise of 0.5% prior.

Meanwhile, the core CPI, which excludes volatile food and energy prices, was unchanged on a monthly basis, and it was up 2.6% on a yearly basis, compared to the 2.9% increase seen in May and the market expectation of 2.8%.

Traders reduce their bets on a July rate hike from the Fed, weighing on the Greenback. The odds of a July rate increase dropped to 16% from 42% on Monday, according to the CME FedWatch tool, although the chance of a rate hike this year was more robust at 80%, down from 89% on Monday.

Fed Chairman Kevin Warsh said on Tuesday the central bank has "no tolerance for persistently elevated inflation," and he did not think that everything was swell after the CPI report.

On the other hand, traders boosted wagers on faster Bank of England (BoE) interest-rate hikes after surging oil prices reignited inflation fears. Markets are fully pricing a quarter-point BoE hike by September, followed by another before year-end, according to Bloomberg.

Pound Sterling FAQs

What is the Pound Sterling?

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, also known as ‘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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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