Pound Sterling surges as soft US Inflation boosts Fed rate-cut prospects
- The Pound Sterling strengthens against the US Dollar as Fed rate cuts become appropriate for this year.
- Softer-than-expected US inflation boosts hopes of Fed rate cuts in September.
- The UK economy grew at a faster pace of 0.4% in May, beating consensus of 0.2%.
The Pound Sterling (GBP) gains to an annual high near 1.2950 against the US Dollar (USD) in Friday’s New York session. The GBP/USD pair strengthens as softer-than-expected United States (US) Consumer Price Index (CPI) data for June has boosted expectations of rate cuts by the Federal Reserve (Fed). Traders bet that the Fed will start reducing interest rates from the September meeting.
The US CPI report showed that annual headline and core inflation, which excludes volatile food and energy prices, decelerated to 3% and 3.3%, respectively. On month, headline inflation deflated for the first time in four years, prompting confidence that price pressures are on course to return to the desired rate of 2%, and high inflationary pressures in the first quarter were a one-time blip.
Softer-than-expected inflation readings have weighed heavily on the US Dollar and boosted Fed officials' confidence that the disinflation process has resumed. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, remains on the backfoot below 104.50.
On Thursday, San Francisco Fed Bank President Mary Daly said recent cooler inflation readings and easing labor market conditions have made one or two rate cuts appropriate for this year.
Meanwhile, the US Producer Price Index (PPI) data for June has turned out hotter than expected. The PPI report showed that headline and core figures grew at a faster pace than expected on a monthly as well as an annual basis. Annual headline and core PPI accelerated to 2.6% and 3.0%, respectively.
Daily digest market movers: Pound Sterling strengthens on strong UK GDP growth
- The Pound Sterling displays sheer strength against its major peers on Friday. The British currency strengthens as the outright victory of Keir Starmer’s Labour Party in parliamentary elections has resulted in the most stable political conditions in the United Kingdom (UK) economy among G-7 nations.
- The outlook for the Pound Sterling has improved, as a stable government results in predictable fiscal policies, which will attract significant foreign inflows. Also, the UK's new Chancellor, Rachel Reeves, pledges to stimulate growth and investment with a major focus on the supply side due to the limited scope of government spending.
- Apart from that, the improved economic outlook and diminished expectations for the Bank of England (BoE) to begin reducing interest rates in August have boosted the Pound Sterling’s appeal. The monthly Gross Domestic Product (GDP) data for May came in higher at 0.4% from the estimates of 0.2% and an unchanged position in April. This has also raised doubts about whether the BoE should pivot to policy normalization in September.
- BoE policymakers hesitate to support early rate cuts as wage growth is roughly double than what is needed to be consistent for achieving price stability. On Wednesday, BoE policymaker Catherine Mann warned that the decline in the annual headline inflation to the 2% target was merely a “touch and go”. She warned that inflation could rise again and remain above the desired rate for the rest of the year.
Pound Sterling Price Today:
British Pound PRICE Today
The table below shows the percentage change of British Pound (GBP) against listed major currencies today. British Pound was the strongest against the Canadian Dollar.
| GBP | EUR | USD | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| GBP | 0.21% | 0.41% | 0.37% | 0.41% | 0.14% | 0.09% | 0.20% | |
| EUR | -0.21% | 0.21% | 0.17% | 0.23% | -0.04% | -0.09% | 0.01% | |
| USD | -0.41% | -0.21% | -0.10% | 0.00% | -0.25% | -0.31% | -0.19% | |
| JPY | -0.37% | -0.17% | 0.10% | 0.05% | -0.17% | -0.25% | -0.13% | |
| CAD | -0.41% | -0.23% | -0.01% | -0.05% | -0.25% | -0.32% | -0.22% | |
| AUD | -0.14% | 0.04% | 0.25% | 0.17% | 0.25% | -0.05% | 0.06% | |
| NZD | -0.09% | 0.09% | 0.31% | 0.25% | 0.32% | 0.05% | 0.12% | |
| CHF | -0.20% | -0.01% | 0.19% | 0.13% | 0.22% | -0.06% | -0.12% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
Technical Analysis: Pound Sterling breaks inverted H&S pattern decisively
The Pound Sterling posts a fresh annual high at 1.2950 against the US Dollar. The GBP/USD pair strengthens after a breakout of an inverted Head and Shoulder (H&S) pattern formed on a daily timeframe. The neckline of the above-mentioned chart pattern is plotted near 1.2850, and a breakout of the H&S formation results in a bullish reversal.
Advancing 20-day Exponential Moving Average (EMA) near 1.2766 suggests that the near-term trend is bullish.
The 14-day Relative Strength Index (RSI) established into the bullish range of 60.00-80.00, indicating that the momentum has leaned to the upside.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
