GBP/USD extends downside below 1.3500 ahead of US CPI release

GBP/USD softens to around 1.3475 in Wednesday’s Asian session.
UK Unemployment Rate ticked higher to 4.6% in three months to April; Claimant Count Change arrived at 33.1K in May.
US and China agreed on a plan to ease trade tensions.

Lallalit Srijandorn FXStreet

The GBP/USD pair extends the decline to around 1.3475 during the Asian trading hours on Wednesday. The Pound Sterling (GBP) weakens against the US Dollar (USD) due to a weaker UK employment report. Later on Wednesday, the attention will shift to the US May Consumer Price Index (CPI) inflation report.

The UK ILO Unemployment Rate ticked higher to 4.6% in the three months to April versus 4.5% prior, the UK Office for National Statistics showed on Tuesday. This figure came in line with the expectations. Meanwhile, the Claimant Count Change came in at 33.1K in May versus -21.2K prior (revised from 5.2K), below the consensus of 9.5K.

Additionally, Average Earnings, excluding Bonus, in the UK increased 5.2% three months year-over-year (3M YoY) in April, compared to a revised 5.5% growth seen in the previous reading. The market forecast was for a 5.4% reading. Average Earnings, including Bonus, rose by 5.3% in the same period after accelerating by a revised 5.6% in the quarter through March. The data missed the estimate of 5.5%.

These figures indicated that the UK labor market is losing steam under pressure from the government's tax and minimum wage hikes. This, in turn, could exert some selling pressure on the Cable in the near term. "This gradual cooling in pay growth may offer some reassurance to the Bank of England, following last month’s inflation reading unexpectedly jumping to its highest level in over a year," said Paige Tao, an economist at PwC UK.

On the USD front, easing trade tension between the United States and China provides some support to the Greenback. Bloomberg reported early Wednesday that the US and China agreed to a preliminary deal on how to implement the consensus the two sides reached in Geneva. However, the tariff uncertainty remains as the full details of their agreement weren’t immediately available. Any signs of renewed fear of trade tensions could weigh on the USD and help limit the pair’s losses.

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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