- The Pound Sterling oscillates in a tight range near 1.2750 against the US Dollar ahead of the US inflation data for November.
- Economists expect the Fed to cut interest rates by 25 bps after the policy meeting on December 18.
- Investors await the UK monthly GDP data to get cues about the current status of the economy.
The Pound Sterling (GBP) trades in a tight range near 1.2750 against the US Dollar (USD) in Wednesday’s European session. The GBP/USD pair consolidates as investors appear to be sidelined ahead of the United States (US) Consumer Price Index (CPI) data for November, which will be published at 13:30 GMT.
The inflation report is expected to show that the annual headline CPI accelerated at a faster pace to 2.7% from the prior release of 2.6%. The core CPI – which excludes volatile food and energy prices – is expected to have risen steadily at 3.3%. The month-on-month headline and core CPI are expected to have grown by 0.3%.
The inflation data is unlikely to influence Federal Reserve (Fed) interest rate expectations for the policy meeting on December 18 unless the data deviates from expectations significantly.
According to the latest Reuters poll, 90% of economists expect that there will be a 25-basis points (bps) interest rate reduction next week. The poll also showed that a majority of economists expect the Fed to pause the policy-easing spree from the first policy meeting of 2025 in January, assuming that policies of higher import tariffs and lower taxes by US President-elect Donald Trump will be inflationary.
Daily digest market movers: Pound Sterling looks at US inflation, UK monthly GDP
- Like the US Dollar, the Pound Sterling is also struggling for a direction against other major currencies amid the light United Kingdom (UK) economic calendar. Therefore, the British currency will be influenced by market expectations for the Bank of England’s (BoE) likely interest rate action in the policy meeting on December 19.
- Traders expect the BoE to leave interest rates unchanged at 4.75% next week as price pressures persist. Ahead of the BoE policy decision, employment data for three months ending October and the Consumer Price Index (CPI) data for November will be released, which could influence BoE interest rate expectations.
- Meanwhile, growing concerns over UK labor market strength could compel BoE officials to deliver a dovish interest rate guidance. A recent survey by the BoE Decision Maker Panel (DMP) showed that one-year forward employment growth expectations fell to four-year lows.
- Later this week, investors will focus on the UK monthly Gross Domestic Product (GDP), and Industrial and Manufacturing Production data for October. The GDP and factory data will show the current status of economic health. Economists expect the factory and GDP data to have expanded after declining in September.
Technical Analysis: Pound Sterling consolidates above 20-day EMA
The Pound Sterling strives to reclaim the key resistance of 1.2800 against the US Dollar. The GBP/USD pair holds slightly above the 20-day Exponential Moving Average (EMA) around 1.2720.
The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting a sideways trend.
Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from the October 2023 low near 1.2035. On the upside, the 200-day EMA around 1.2830 will act as key resistance.
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.
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