GBP/USD slumps on strong US producer inflation, Fed rate cut odds trim
- Pound drops versus strong Dollar post-US PPI, indicating inflation.
- US Retail Sales resilience muddles Fed rate cut forecast.
- UK growth adjusts BoE cut expectations in global policy reevaluations.
- The US job market and higher Treasury yields strengthen the US Dollar, weighing on GBP.
The Pound Sterling tumbled against the US Dollar on Thursday after the US Department of Labor announced a rebound on inflation on the producer side that could dent the Federal Reserve’s easing policy. Therefore, the GBP/USD edges lower, trading at 1.2748, down 0.38%.
GBP/USD weakens as US economic data prevent Fed from easing policy, as US yields rise
The Greenback is gathering momentum as it remains bid following a tranche of US economic data. US Retail Sales missed the estimates of 0.8% but improved by 0.6% MoM after plunging sharply in January. Even though the data would justify a rate cut by the Federal Reserve, a measure of inflation on the producer side known as the Producer Price Index (PPI), reaccelerated.
February’s PPI was strong, at 1.6% YoY, up from 0.9%, while the core PPI stood at 2% unchanged. Both figures exceeded estimates.
The labor market remained tight, as Initial Jobless Claims for the last week dipped from 210K to 209K, below estimates of 218K.
After the data US Treasury bond yields had risen sharply, with the 10-year benchmark note rate sitting at 4.296%. The US Dollar Index (DXY), a gauge of the buck’s performance versus other currencies, climbed 0.53%, yo at 103.33.
Across the ponds, the latest GDP figures for the UK showed the economy exited from a recession and grew 0.2% MoM in January. This has pushed back expectations for a Bank of England rate cut from June to August.
Given the backdrop of the Fed's expected decrease in interest rates in June, the GBP/USD should be favored in the near term. However, if US data continues to remain strong, further GBP/USD downside is seen.
GBP/USD Price Analysis: Technical outlook
The daily chart portrays the pair has broken the previous weekly low of 1.2744, but a daily close below that level is needed, before the Pound Sterling weakens further. In that event, the next support would be 1.2700, followed by fresh lows at the 50-day moving average (DMA) at 1.2685. On the other hand, if buyers reclaim 1.2800, look for a test of weekly highs at 1.2823.
Pound Sterling FAQs
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, aka ‘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).
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.
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.
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
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
