Pound Sterling consolidates as focus shifts to US Inflation
- The Pound Sterling trades sideways though BoE rate cut expectations firm.
- Diminished speculation for the Fed pivoting to rate cuts in June provides support to the US Dollar.
- This week, the US Inflation data will significantly impact Fed rate cut expectations.
The Pound Sterling (GBP) broadly consolidates in a tight range above 1.2600 in Monday’s early New York session. The GBP/USD pair trades sideways as investors await the United States Consumer Price Index (CPI) data for March, which will be published on Wednesday. The inflation data will provide more clarity over whether the Federal Reserve (Fed) will begin to reduce interest rates from June.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is slightly up near 104.30.
Currently, market expectations for the Fed kicking off its rate-cut cycle in June have waned significantly after Friday’s strong US employment report. The report showed that labor demand by US employers remained strong even though the Fed is maintaining interest rates higher in the range of 5.25%-5.50%.
Strong payroll data cast doubts over progress in inflation declining to the 2% target. This could allow Fed policymakers to maintain their view of keeping interest rates higher and avoid rushing for any rate cuts.
In the United Kingdom, investors’ expectations for the Bank of England (BoE) to start reducing interest rates from the June meeting have recently deepened on increasing signs that price pressures are easing. This week, the Pound Sterling will be guided by the monthly Gross Domestic Product (GDP) and factory data for February, which will be published on Friday. Recently, S&P Global/CIPS showed that the UK Manufacturing PMI returned to growth after contracting for 20 months in a row.
Daily digest market movers: Pound Sterling struggles for direction
- The Pound Sterling oscillates in a tight range around 1.2630 as investors seek fresh guidance on when the Bank of England will pivot to rate cuts this year. Financial markets are anticipating this will happen in June after recent data suggested that inflation pressures have cooled down in recent months.
- United Kingdom’s strong wage growth remains a major force behind inflation. However, a survey from the UK’s Recruitment and Employment Confederation showed that starting salaries for permanent staff grew at the slowest rate in over three years in March, while spending on temporary workers fell by the most since July 2020. This adds to signs of a slowdown in Britain's job market,” Reuters reported.
- The official Average Earnings Excluding Bonuses rose by 6.1% year over year in the three months ending February. The pace at which wages are increasing is almost double than what’s required to bring inflation down to the required rate of 2%. Therefore, BoE policymakers need to see a significant decline in wage growth so that they can be convinced that inflation will pivot to 2%.
- Going forward, market sentiment after the United States consumer price inflation data for March will be the main driver for the Pound Sterling’s moves.
- The US inflation data will indicate whether the Fed will begin reducing interest rates from the June meeting. Speculation for Fed rate cuts in June has been reduced significantly as the hiring data remained robust in March. US employers recruited 303K fresh payrolls, significantly better than expectations of 200K and the prior reading of 270K. The Unemployment Rate fell to 3.8% from the consensus and the prior reading of 3.9%.
Technical Analysis: Pound Sterling trades above 1.2600
The Pound Sterling trades inside a Falling Channel formation on a daily timeframe in which each pullback move is considered as a selling opportunity by the market participants. The 200-day Exponential Moving Average (EMA) near 1.2570 provides support to the Pound Sterling bulls.
On the downside, the psychological level of 1.2500 plotted from December 8 low will also be a major support for the Cable.
The 14-period Relative Strength Index (RSI) hovers near 40.00. A bearish momentum could trigger if the RSI decisively breaks below the same.
(This story was corrected on April 8 at 09:25 GMT to say in the second paragraph that the DXY US Dollar Index tracks the Greenback’s value against six major currencies, not against the US Dollar.)
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.
