- The Pound Sterling moves higher above 1.2700 as the UK inflation cools down further in line with expectations.
- UK service inflation remains sticky, which could restrict the BoE from committing rate cuts in the near term.
- Slower-than-expected US Retail Sales growth has limited the US Dollar upside.
The Pound Sterling (GBP) edges higher above the round-level resistance of 1.2700 on Wednesday after the United Kingdom (UK) Office for National Statistics (ONS) showed that price pressures declined as expected in May. UK’s annual headline inflation returned to the central bank’s target of 2% for the first time in more than three years from April’s reading of 2.3%. In the same period, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, declined to 3.5% from the former reading of 3.9%.
Monthly headline inflation grew steadily by 0.3% but lower than estimates of 0.4%. The report also showed that the annual Producer Price Index (PPI) for Core Output grew significantly by 1.0% in May, compared with the 0.3% increase a month earlier.
In spite of a decline in the annual headline CPI to 2%, Bank of England (BoE) policymakers might not be comfortable with discussions on early rate cuts as annual service inflation barely decelerated. Inflation in the service sector grew by 5.9%, slightly lower than the prior release of 6.0%, but is almost double that which is needed to contain price pressures.
The next trigger for the Pound Sterling will be the BoE’s monetary policy decision, which will be announced on Thursday. The BoE is widely anticipated to keep the interest rate unchanged at 5.25%. Therefore, investors will focus on vote split and fresh cues about when the BoE will start reducing interest rates.
Daily digest market movers: Pound Sterling moves higher as UK service inflation barely declines
- The Pound Sterling strengthens against the US Dollar (USD) as UK service inflation grew by 5.9% year-over-year in May, slightly declining from 6.0%, but keeping broadly stubborn. Meanwhile, the US Dollar steadies after a modest correction led by slower-than-expected United States (US) monthly Retail Sales growth for May, which allowed financial markets to raise their bets for early rate cuts by the Federal Reserve (Fed). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds the crucial support of 105.00 after correcting from a fresh six-week high of 105.80.
- The US Census Bureau showed on Tuesday that Retail Sales missed estimates of 0.2% growth but increased an uptick of 0.1% in May after contracting by 0.2% in April, downwardly revised from 0%. Core Retail Sales excluding automobiles contracted steadily by 0.2%, deepening fears of a slower Q2 Gross Domestic Product (GDP). Core Retail Sales data is a key measure of consumer spending, which is a crucial component of GDP.
- Investors noticed that sales were hit by lower ticket sizes at service stations due to lower gasoline and motor vehicle prices, weak demand for building materials, and a decline in footprints at food services and drinking places. This suggests that households cut spending on discretionary items, which is generally the outcome of soft purchasing power due to higher inflation and interest rates.
- According to the CME FedWatch tool, 30-day Fed Funds futures pricing data suggest two interest rate cuts this year against only one signaled by Fed policymakers in their latest interest rate projections. Investors see the Fed reducing interest rates twice this year as a soft US inflation report for May indicated that the progress in the disinflation process has resumed.
- On Tuesday, Dallas Fed Bank President Lorie Logan said the latest inflation figures showing that price pressures are cooling is welcome news. However, policymakers need to see more good data before considering rate cuts.
Technical Analysis: Pound Sterling recovers further above 1.2700
The Pound Sterling extends its recovery above 1.2700 on sticky UK service inflation data. The GBP/USD pair rises to near the 20-day Exponential Moving Average (EMA) at 1.2720, though the near-term trend is still uncertain. The 50-day EMA near 1.2670 is acting as a major support for the Pound Sterling bulls.
Currently, the Cable holds the 61.8% Fibonacci retracement support (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300) at 1.2667.
The 14-period Relative Strength Index (RSI) falls back into the 40.00-60.00 range, indicating that the upside momentum has faded.
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.
