GBP/USD trades with negative bias below mid-1.2900s, downside seems limited ahead of US CPI

GBP/USD retreats from a multi-month top amid some repositioning ahead of the US CPI.
Bets that the Fed will cut rates further amid recession fears should cap any USD recovery.
Expectations for a slow BoE rate-cutting cycle could underpin the GBP and support the pair.

Haresh Menghani FXStreet

The GBP/USD pair edges lower during the Asian session on Wednesday and erodes a part of the previous day's strong move up to over a four-month peak, around the 1.2965 area. Spot prices currently trade around the 1.2935 region, though the downtick lacks bearish conviction as traders keenly await the release of the US consumer inflation figures before placing fresh directional bets.

The US Consumer Price Index (CPI) report will play a key role in influencing market expectations about the Federal Reserve's (Fed) rate-cut path, which, in turn, will drive the US Dollar (USD) demand and provide a fresh impetus to the GBP/USD pair. In the meantime, some repositioning trade ahead of the crucial data assists the buck to recover a part of the previous day's slide to its lowest level since mid-October and acts as a headwind for the currency pair.

Any meaningful USD appreciation, however, seems elusive in the wake of growing acceptance that the Federal Reserve (Fed) will cut interest rates several times this year amid worries about a tariff-driven slowdown in the US economic activity. Apart from this, expectations that the Bank of England (BoE) will cut rates more slowly than other central banks, including the Fed, might underpin the British Pound (GBP) and lend support to the GBP/USD pair.

Even from a technical perspective, last week's sustained breakout above the very important 200-day Simple Moving Average (SMA) was seen as a key trigger for bulls and suggests that the path of least resistance for the currency pair is to the upside. Hence, any further corrective slide might still be seen as a buying opportunity and is more likely to remain limited.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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