GBP/USD hesitates above 1.3600 with markets awaiting US inflation data

GBP/USD is hovering around 1.3600 after retreating from 1.3712 highs earlier this week.
Major FX currencies trade within tight ranges, awaiting US CPI data.
UK GDP disappointed on Thursday and boosted hopes of further BoE rate cuts

Guillermo Alcala FXStreet

The Pound (GBP) extends losses against the US Dollar (USD) for the fourth consecutive day, trading around 1.3600 on Friday after pulling back from weekly highs above 1.3700. The risk-averse market mood is underpinning USD’s recovery, with trading volumes subdued ahead of the release of US Consumer Price Index figures.

Headline inflation is expected to have grown at a steady 0.3% pace in January, with annual inflation easing to 2.5% from 2.7% in December. The core CPI, which strips out the influence of seasonal food and energy prices, is also seen declining year-on-year to 2.5% from 2.6% in December.

The risk on Friday is a steeper-than-expected decline in consumer prices, which, in light of recent weak US data, might boost hopes of immediate Federal Reserve (Fed) rate cuts and send the USD lower across the board.

In the UK, Gross Domestic Product (GDP) figures released on Thursday added negative pressure on the Pound. The Q4 GDP grew 0.1% in the quarter, and 1% from the same period last year, against the market expectations of 0.2% and a 1.2% respective advances. Additional data suggested that economic growth had been weighed down by a sharp contraction in the manufacturing sector in December and a stalled services sector’s output.

These figures have heightened expectations that the Bank of England (BoE) will be forced to put extra effort into boosting economic growth.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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