Pound Sterling refreshes weekly high ahead of UK labor market, US CPI data

The Pound Sterling rises to 1.2550 inspired by strong UK Q1 GDP data.
The UK economy expanded by 0.6%, moving out of the recession seen in the second half of 2023.
Investors await UK employment and US inflation data for fresh guidance.

The Pound Sterling (GBP) remains well-supported above the psychological support of 1.2500 against the US Dollar (USD) in Monday’s New York session. The GBP/USD pair holds firmly as the US Dollar fails to recover losses driven by higher-than-expected Initial Jobless Claims for the week ending May 3, which raised concerns over the health of the United States labor market.

The confidence of financial markets for the US Federal Reserve (Fed) to start lowering interest rates from the September meeting has increased as US labor market conditions have cooled down. For now, investors shift their focus to the US Consumer Price Index (CPI) data for April, which will be published on Wednesday.

Annual headline CPI is forecasted to have softened to 3.4% from 3.5% in March. In the same period, the core inflation, which strips off volatile food and energy prices, is anticipated to have decelerated to 3.6% from the prior reading of 3.8%. Economists expect that the monthly headline and core CPI have grown at a slower pace of 0.3% from the prior reading of 0.4%.

Daily digest market movers: Pound Sterling extends its upside as US Dollar slumps

The Pound Sterling holds strength inspired by the robust UK Q1 Gross Domestic Product (GDP) data released on Friday. The United Kingdom Office for National Statistics (ONS) reported that the economy expanded at a stronger pace of 0.6%, beating estimates of 0.4%. This led to an end to the technical recession registered in the second half of 2023.
After the GDP data, UK Chancellor Jeremy Hunt said: "There is no doubt it has been a difficult few years, but today's growth figures are proof that the economy is returning to full health for the first time since the pandemic," Reuters reported.
After strong UK growth data, the strength of the UK economy will now be tested on the grounds of labor market data, which will be published on Tuesday. Economists expect that the ILO Unemployment Rate for the three months ending March rose to 4.3% from the prior reading of 4.2%. Apart from the jobless rate, investors will keenly on the Average Earnings data that has been fuelling service inflation, which is almost double that of what should be consistent to bring inflation down to the 2% target.
Annual Average Earnings Including Bonuses are estimated to have slowed to 5.3% in the three months ending March from the prior reading of 5.6%. A sharp decline in the wage growth momentum would boost expectations for the BoE to begin reducing interest rates in June.
Last week, the BoE kept interest rates steady at 5.25% for the sixth time in a row. Overall, the BoE's communication indicated that it is swiftly leaning toward policy normalization. BoE Deputy Governor Dave Ramsden joined policymaker Swati Dhingra and voted for a rate cut by 25 basis points (bps) to 5.0%. In the press conference, BoE Governor Andrew Bailey said the central bank could deliver more rate cuts than investors have anticipated.

Technical Analysis: Pound Sterling exhibits strength above 1.2500

The Pound Sterling advances to 1.2540 on Monday due to multiple tailwinds. The GBP/USD pair recovered sharply from 50% Fibonacci retracement (plotted from April 22 low of 1.2299 to May 3 high of 1.2634) near 1.2470. The Cable remains sticky to the 20-day Exponential Moving Average (EMA), which trades around 1.2520, suggesting a sideways trend.

The pair is still below the neckline of the Head and Shoulder (H&S) chart pattern formed on a daily timeframe. On April 12, the Cable fell sharply after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

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).

How does the Bank of England’s monetary policy influence Sterling?

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.

What is Quantitative Easing (QE) and how does it affect the Pound?

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.

What is Quantitative tightening (QT) and how does it affect the 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.

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