Pound Sterling weakens against USD ahead of FOMC minutes
- The Pound Sterling declines in the aftermath of the hotter-than-expected UK inflation report for January.
- BoE's Bailey expects the uptick in inflation won’t be persistent in nature.
- US President Trump threatens to impose 25% tariffs on automobiles, semiconductors, and pharmaceuticals.
The Pound Sterling slides to near 1.2580 against the US Dollar (USD) in Wednesday’s North American session. The GBP/USD pair weakens as the US Dollar gains, with the US Dollar Index (DXY) rising to near 107.20, ahead of the release of the Federal Open Market Committee (FOMC) minutes for the January meeting, which will be published at 19:00 GMT.
Investors will focus on FOMC minutes for the January decision to get cues about how long the Federal Reserve (Fed) will keep interest rates steady in the range of 4.25%-4.50%. In the January meeting, the Fed announced a pause in its monetary expansion cycle after cutting interest rates by 100 basis points (bps) in the last three meetings of 2024. Fed Chair Jerome Powell guided that monetary policy adjustments would become appropriate when officials see “real progress in inflation or at least some weakness in the labor market”.
On Tuesday, San Francisco Fed Bank President Mary Daly also favored a “restrictive” monetary policy stance until she sees a continuation in progress in the disinflation trend.
Meanwhile, renewed fears of tariffs by United States (US) President Donald Trump have also offered some support to the US Dollar. President Trump said on Tuesday that he plans to impose 25% tariffs on imports of automobiles, semiconductors, and pharmaceuticals, which could increase further over the next year. This could lead to a slowdown in the global economy.
Daily digest market movers: Pound Sterling weakens as BoE expects an uptick in inflation to be temporary
- The Pound Sterling weakens against its major peers even though the United Kingdom (UK) Consumer Price Index (CPI) report for January showed that inflationary pressures accelerated at a faster-than-expected pace. In the 12 months to January, the headline CPI rose by 3%, faster than estimates of 2.8% and the December reading of 2.5%. In the same period, the core CPI – which excludes volatile components of food, energy, alcohol, and tobacco – grew by 3.7%, as expected, faster than the former reading of 3.2%.
- Month-on-month headline CPI inflation deflated at a slower-than-projected pace of 0.1%, compared to the 0.3% growth in December. Economists expected headline inflation to deflate at that pace this month. Inflation in the services sector, which is closely tracked by Bank of England (BoE) officials, accelerated to 5% from 4.4% in December.
- The impact of high inflation data is unlikely to be secularly positive for the British currency. BoE officials have already communicated in their latest monetary policy statement that price pressures could tick higher in the short term due to rising energy prices before returning to their 2% path.
- On Monday, BoE Governor Andrew Bailey also said in an interview with BusinessLine that the impact of an expected increase in inflation won’t be “persistent,” and still sees the “gradual disinflation going on”. Bailey added that a “sluggish state” of the economy is also likely to “act against inflation”, Reuters reported. However, an increase in inflationary pressures is expected to restrict the BoE from further monetary easing.
- Going forward, investors will focus on the UK Retail Sales data for January and the preliminary S&P Global/CIPS Purchasing Managers Index (PMI) data for February, which will be released on Friday.
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 Euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.16% | 0.14% | -0.20% | 0.09% | 0.01% | -0.21% | -0.02% | |
| EUR | -0.16% | -0.03% | -0.35% | -0.07% | -0.16% | -0.37% | -0.19% | |
| GBP | -0.14% | 0.03% | -0.34% | -0.05% | -0.13% | -0.34% | -0.16% | |
| JPY | 0.20% | 0.35% | 0.34% | 0.27% | 0.19% | -0.04% | 0.16% | |
| CAD | -0.09% | 0.07% | 0.05% | -0.27% | -0.08% | -0.29% | -0.12% | |
| AUD | -0.01% | 0.16% | 0.13% | -0.19% | 0.08% | -0.22% | -0.03% | |
| NZD | 0.21% | 0.37% | 0.34% | 0.04% | 0.29% | 0.22% | 0.19% | |
| CHF | 0.02% | 0.19% | 0.16% | -0.16% | 0.12% | 0.03% | -0.19% |
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 faces pressure near 100-day EMA
The Pound Sterling falls back below the key level of 1.2600 against the US Dollar in North American trading hours on Wednesday. The GBP/USD pair faces pressure while attempting to break above the 38.2% Fibonacci retracement, which coincides with the 100-day Exponential Moving Average (EMA), around 1.2620.
The 14-day Relative Strength Index (RSI) struggles to hold above 60.00. The bullish momentum would fizzle out if the RSI (14) fails to sustain above that level.
Looking down, the February 3 low of 1.2250 will act as a key support zone for the pair. On the upside, the 50% Fibonacci retracement at 1.2767 will act as a key resistance zone.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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.
