GBP/USD eases back as CPI inflation data looms

GBP/USD is pushing back down to the 1.3400 region after a brief rally.
Key technical averages are keeping price action under pressure from both sides.
UK and US CPI inflation data is due this week, rate watchers to be on their toes.

Joshua Gibson FXStreet

GBP/USD caught a second softly bearish session on Monday, colling back into touch range of the 1.3400 handle. Cable’s near-term bull run came to a quick end after price action ran into the 50-day Exponential Moving Average (EMA) near 1.3450 late last week, and now Pound Sterling (GBP) traders are bracing for a double-header of Consumer Price Index (CPI) inflation data from both the UK and the US this week.

It’s a quiet start to the economic data docket on both sides of the Atlantic, but UK CPI inflation figures for September are slated for Wednesday. UK CPI inflation is expected to accelerate slightly for the year ended in September. However, the increases are not likely to be steep enough to spark any significant changes in the Bank of England’s (BoE) current rate-targeting schedule.

US CPI inflation, which is due on Friday, is another matter entirely. US CPI inflation metrics are largely expected to remain unchanged in September, but datawatchers are on the lookout for any top side wriggles in inflation data as tariff impacts continue to leak their way through the US economy. The Federal Reserve (Fed) is firmly on pace to deliver two more interest rate cuts through the end of the year, but any sharp upticks in inflationary pressures could throw rate betting markets for a loop.

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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