Pound Sterling jumps as UK service inflation accelerates to 5.6%
- The Pound Sterling jumps to near 1.3180 against the US Dollar as UK core inflation rose faster than expected in August.
- UK core CPI grew by 3.6%, while the headline inflation was stable at 2.2% as expected.
- The Fed seems prepared to announce its first interest-rate cut in more than four years.
The Pound Sterling (GBP) gains against its major peers in Wednesday’s London session as the United Kingdom (UK) inflation data for August came in hotter than expected. The Office for National Statistics (ONS) reported that the core Consumer Price Index (CPI) – which excludes volatile items such as food, energy, oil and tobacco – rose by 3.6%, more than the 3.5% estimated and accelerating from 3.3% in July.
Services inflation, a closely watched indicator by Bank of England (BoE) officials, rose sharply to 5.6% from 5.2% in July. This acceleration in inflation could force traders to pare back bets supporting one more interest rate cut by the Bank of England (BoE) in the remainder of the year.
Headline inflation, meanwhile, rose by 0.3% and 2.2% on a monthly and annual basis, respectively, meeting analysts' expectations.
Going forward, investors will focus on the BoE’s monetary policy announcement on Thursday. Before inflation data came out, markets were already expecting the BoE to leave interest rates unchanged at 5%. With August data signaling that inflation remains stubborn, market expectations for rates remaining at their current levels by the year-end may increase.
Daily digest market movers: Pound Sterling outperforms US Dollar ahead of Fed meeting
- The Pound Sterling jumps to near 1.3170 against the US Dollar (US) after the release of the hot UK inflation data for August. The GBP/USD pair aims to reclaim the immediate resistance of 1.3200. The Cable is expected to face volatility as the Federal Reserve’s (Fed) monetary policy decision will be announced at 18:00 GMT.
- According to the CME FedWatch tool, the central bank is certain to start reducing interest rates. This will be the first interest rate cut decision by the Fed in over four years. However, the debate is over the pace by which key borrowing rates will be reduced. 30-day Federal Funds Futures pricing data shows that the probability of the central bank cutting rates by 50 basis points (bps) to 4.75%-5.00% is at 65%, while the rest favors a 25-bps rate cut.
- The Fed will pivot to policy normalization as the latest commentaries from officials indicated that the central bank is more concerned about deteriorating labor demand rather than inflation.
- Apart from the Fed’s policy decision, investors will also focus on the Fed’s dot plot, economic projections and the press conference of Fed Chair Jerome Powell after the interest rate decision. The Fed dot plot indicates the collective forecast for the federal fund rate by all policymakers in the medium and long term.
Technical Analysis: Pound Sterling aims to reclaim 1.3200
The Pound Sterling approaches 1.3200 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as it holds above the 20-day Exponential Moving Average (EMA) near 1.3100. Earlier, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21.
The 14-day Relative Strength Index (RSI) stands around 60.00. A fresh round of bullish momentum could occur if the oscillator sustains around this level.
Looking up, the Cable will face resistance near the August 27 high of 1.3266 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.
Pound Sterling FAQs
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, aka ‘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.