Pound Sterling slumps on UK’s soft inflation, Fed policy in focus


  • The Pound Sterling slumps on lower-than-anticipated UK CPI data for February.
  • Soft UK inflation reinforces market expectations for the BoE to begin reducing interest rates in August.
  • The Fed’s monetary policy meeting will guide the next move in the US Dollar.

The Pound Sterling (GBP) falls sharply in Wednesday’s London session as the United Kingdom Office for National Statistics (ONS) reported softer-than-expected Consumer Price Index (CPI) data for February. Annual headline and core inflation decelerated to 3.4% and 4.5%, respectively. Lower inflation is expected to allow Bank of England (BoE) policymakers to consider cutting interest rates earlier than what market participants had anticipated.

Investors should brace for high volatility in the Pound Sterling as the BoE is set to announce its second monetary policy decision of 2024 on Thursday. Investors are expecting the BoE to hold interest rates steady at 5.25%, but soft inflation data might allow policymakers to deliver slightly dovish guidance on interest rates. 

Meanwhile, investors remain risk-averse ahead of the Federal Reserve’s (Fed) policy meeting, which will be announced at 18:00 GMT. Investors will keenly focus on the quarterly updated dot plot and economic projections as the Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50%. The dot plot shows interest rate projections from Fed officials for various time frames.

Daily digest market movers: Pound Sterling remains on backfoot ahead of Fed policy

  • The Pound Sterling faces selling pressure as the United Kingdom ONS has reported softer-than-expected consumer price inflation data for February. The annual headline inflation significantly decelerated to 3.4% from expectations of 3.6% and the prior reading of 4.0%. The monthly headline CPI grew by 0.6%, rebounding from a similar decline seen in January. Investors anticipated the monthly headline inflation to grow at a higher pace of 0.7%.
  • The annual core CPI, which strips off volatile food and energy prices, softened to 4.5% from estimates of 4.6% and the former reading of 5.1%. BoE policymakers generally consider the core inflation data as a preferred measure for decision-making on interest rates. Soft figures might increase their confidence that inflation will sustainably return to the desired rate of 2%. BoE policymakers have been reiterating that rate cuts would be appropriate only if they get convinced that the inflation target will be achieved.
  • The Pound Sterling is expected to remain volatile as investors will shift focus to the Bank of England’s interest rate decision, which will be announced on Thursday. The BoE is expected to keep interest rates unchanged at 5.25% for the fifth time in a row. Investors will look for cues about when the BoE will start reducing interest rates. Currently, investors hope that the BoE will start reducing interest rates from the August meeting. The soft inflation data released on Wednesday is likely to reinforce these expectations.
  • Meanwhile, the market sentiment remains cautious ahead of the Federal Reserve’s monetary policy decision. The CME FedWatch tool shows that the central bank is set to keep interest rates unchanged in the range of 5.25%-5.50%. With the no-change in interest rates almost fully priced in,  the monetary policy statement, Fed Chair Jerome Powell’s press conference, and the dot plot, and economic projections will be in focus. 

Technical Analysis: Pound Sterling struggles to sustain above 1.2700

The Pound Sterling falls slightly below the breakout region of the Descending Triangle formed around 1.2700. The near-term demand for the GBP/USD pair remains uncertain as it struggles to sustain above the 20-day Exponential Moving Average (EMA), which trades around 1.2730. 

On the downside, the downward-sloping border of the Descending Triangle chart pattern will support the Pound Sterling. On the upside, a seven-month high at around 1.2900 will be a major barricade for the Cable.

The 14-period Relative Strength Index (RSI) returns to the 40.00-60.00 range, indicating a sharp volatility contraction.

 

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

 

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

AUD/USD steady around 0.6640 ahead of Aussie’s inflation data

AUD/USD steady around 0.6640 ahead of Aussie’s inflation data

The Australian Dollar registered minuscule losses against the US Dollar on Tuesday amid higher US Treasury yields.  A softer-than-expected US 5-year Treasury note auction boosted the Greenback, which posed gains versus most other currencies. As the Asian session begins, the AUD/USD trades at 0.6649.

AUD/USD News

EUR/USD churns chart paper but makes little progress ahead of Wednesday’s German CPI inflation

EUR/USD churns chart paper but makes little progress ahead of Wednesday’s German CPI inflation

EUR/USD rose to an intraday high near 1.0890 on Tuesday before market flows dragged the pair back down to familiar levels near 1.0860, and the pair is holding on-balance as Euro traders head into a fresh print of German Consumer Price Index inflation. 

EUR/USD News

Gold shines bright and hits three-day high despite Fed hawkish commentary

Gold shines bright and hits three-day high despite Fed hawkish commentary

Gold price was modestly up late in the North American session, registering gains of around 0.15% amid high US Treasury bond yields that make it less appealing to hold the non-yielding metal. Consequently, the Greenback erased its previous losses, capping Gold’s rally. The XAU/USD trades around $2,357.

Gold News

Ethereum follows sideways trend as ETH community favors 'programmable money' slogan

Ethereum follows sideways trend as ETH community favors 'programmable money' slogan

Ethereum followed a sideways trend on Tuesday as the crypto community seems to favor the term 'programmable money' as ETH's one-liner. Meanwhile, whales have continued accumulating ETH despite profiting from the recent price spike.

Read more

Price inflation isn't an accident; It's a policy

Price inflation isn't an accident; It's a policy

If you listen to government officials and central bankers talk about price inflation, you might think they don’t have the foggiest idea of what caused it. It might have been supply chain problems, or perhaps it was Putin’s fault.

Read more

Forex MAJORS

Cryptocurrencies

Signatures