GBP/USD holds positive ground above 1.3450 after UK CPI data, Fed rate decision eyed

GBP/USD attracts some buyers to around 1.3460 in Wednesday’s early European session.
UK CPI inflation eased to 3.4% YoY in May, as expected
The Fed interest rate decision will take center stage later on Wednesday, with no change in rate expected.

Lallalit Srijandorn FXStreet

The GBP/USD pair strengthens near 1.3460 during the early European trading hours on Wednesday. The Pound Sterling (GBP) remains firm against the Greenback after the UK Consumer Price Index (CPI) inflation report. The attention will shift to the US Federal Reserve (Fed) interest rate decision later on Wednesday.

Data released by the United Kingdom’s Office for National Statistics on Wednesday showed that the country’s headline CPI rose 3.4% YoY in May, compared to a rise of 3.5% in April. This reading came in line with the market consensus. The Core CPI, which excludes the volatile prices of food and energy, climbed 3.5% YoY in May versus 3.8% prior, softer than the expectation of 3.6%.

Meanwhile, the monthly UK CPI inflation eased to 0.2% in May from 1.2% in April. Markets projected an increase of 0.2% reading. The Pound Sterling holds positive ground in an immediate reaction to the mixed UK CPI inflation data.

On the USD’s front, the Fed is expected to leave borrowing costs unchanged at its June meeting on Wednesday. Traders now see a nearly 80% possibility of a Fed rate cut in September, followed by another one in October, according to Reuters. Traders will take more cues from the FOMC Press Conference. If the Fed delivers a dovish hold, the Greenback is likely to resume weakening.

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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