Pound drops back under 1.34 after a hot US inflation report

GBP/USD erases Monday's gain and drops to its lowest since late October.
A December Fed hike would lift its floor to the UK's 4.00% Bank Rate.
UK third-quarter growth figures are due Thursday, forecast at 0.7%.

Joshua Gibson FXStreet

The UK's Bank Rate is level with the top of the Fed's 3.75%-4.00% range, and a hot US inflation report has left a December Fed hike fully priced. The Pound has given back all of Monday's rise, dropping to just above 1.3300 for its lowest since late October, and has steadied near 1.3350.

Fed Governor Waller said in London that a December hike is likely and a half-point move is possible, and October US consumer prices then beat forecasts. Traders give a quarter-point December hike about 90% and a half-point about 10%. Either would lift the Fed's floor to the 4.00% the Bank of England (BoE) only reached with its November 5 hike.

BoE Deputy Governor Lombardelli said another near-term hike looks likely unless inflation pressures clearly ease, citing a UK job market where firms neither hire nor fire much. Bets on more BoE hikes had already helped the Pound rise on Monday, so her remarks added little against a Dollar that rose on the US figures.

On the calendar

UK third-quarter Gross Domestic Product (GDP) is due at 07:00 GMT on Thursday, forecast up 0.7% after 0.5%, with September alone forecast flat after a 0.1% rise. A stronger quarter would add to the case BoE Deputy Governor Lombardelli made for another hike.

New York Fed President Williams has a 23:30 GMT slot on Thursday. Friday's October US producer price figure, out at 13:30 GMT, has a 0.4% forecast against September's 1.3%. Both bear on the size of the Fed's December 9 move, not whether it comes.

On the charts

The drop has taken back more than two fifths of the climb from the October 14 low just below 1.3150 to the November 4 high near 1.3500. That high was the Pound's highest since mid-September, and it stalled at the same level on November 5.

GBP/USD daily chart

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

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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