Pound Sterling faces pressure as UK core, services inflation cools down
- The Pound Sterling faces slight offers against its peers after the UK CPI data release.
- The UK headline CPI rose as expected by 3.3% YoY in March, while core and services inflation cooled.
- Investors await the flash UK S&P Global PMI and the Retail Sales data.
The Pound Sterling (GBP) faces slight selling pressure against its major currency peers after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for March. The British currency drops to near 1.3518 against the US Dollar (USD), but still holds little gains.
The Office for National Statistics (ONS) has reported that the headline inflation accelerated to 3.3% Year-on-Year (YoY), as expected, from 3% in February. The core CPI – which excludes volatile components of food, energy, alcohol, and tobacco – grew at a moderate pace of 3.1% YoY, while it was expected to have risen steadily by 3.2%.
On a monthly basis, the UK headline CPI rose strongly by 0.7% against estimates of 0.6% and the previous reading of 0.4%. Inflation in the services sector, which is closely tracked by Bank of England (BoE) officials, has cooled down to 4.3% from 4.4% in February
While the UK headline inflation was already anticipated to accelerate in the wake of higher energy prices amid Middle East conflicts, lower core and services inflation data are expected to allow BoE officials to leave interest rates unchanged at 3.75% in the policy meeting on April 30.
Investors expect the British currency to trade highly volatile in the remaining week, as the preliminary S&P Global Purchasing Managers' Index (PMI) data for April and the Retail Sales data for March are scheduled to be published on Thursday and Friday, respectively.
On the geopolitical front, United States (US) President Donald Trump has announced a ceasefire extension for an indefinite period.
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, 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).
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
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.
