GBP/USD continues to test 1.3550 as US CPI inflation print looms

GBP/USD found slim gains on Wednesday as markets await the latest inflation update.
US PPI inflation eased in August, bolstering bets of a Fed rate cut next week.
US CPI inflation is due on Thursday, and could complicate the Fed’s path into further rate cuts.

Joshua Gibson FXStreet

GBP/USD caught a slim bullish step forward on Wednesday, testing the 1.3550 region for the fourth straight trading day, but thus far remains unable to make any further progress. US Producer Price Index (PPI) inflation eased lower in August, giving even further credence to the market’s expectations of a Federal Reserve (Fed) rate cut on September 17.

US PPI business-level inflation eased much faster than expected in August, with core PPI cooling to 2.8% YoY versus the last print of 3.5%. PPI inflation cooling off in these economic environments is hardly surprising: PPI metrics specifically exclude any imported or foreign trade goods entirely, giving a brief snapshot of domestic price pressures in the US.

With the majority of price increases facing consumers at the hands of widespread tariffs, and now the end of the de minimis exemption for small-scale shipping and retailer items, US consumers will bear the brunt of the burden for paying the import fees on cheaper, foreign-made retail goods. US Consumer Price Index (CPI) inflation is due on Thursday, and headline CPI inflation is expected to show yet another uptick to 2.9% for the year ended in August. Core CPI is forecast to hold steady at 3.1% on an annual basis, still holding well above the Fed’s 2% inflation target.

According to the CME's FedWatch Tool, rate markets are pricing in over 90% odds that the Fed will deliver a 25 basis-point cut next week.

GBP/USD daily chart

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

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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