Pound Sterling gains on hot UK inflation report
- The Pound Sterling attracts bids after the release of a hotter-than-expected UK inflation report for January.
- BoE's Bailey expects the uptick in inflation won’t be persistent in nature.
- US President Trump threatens to impose 25% tariffs on automobiles, semiconductors, and pharmaceuticals.
The Pound Sterling moves higher against its major peers after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for January, which showed that inflationary pressures accelerated at a faster-than-expected pace. In the year, the headline CPI rose by 3%, faster than estimates of 2.8% and the December reading of 2.5%. In the same period, the core CPI – which excludes volatile components of food, energy, alcohol, and tobacco – grew by 3.7%, as expected, faster than the former reading of 3.2%.
Month-on-month headline CPI inflation deflated at a slower-than-projected pace of 0.1%, compared to the 0.3% growth in December. Economists expected headline inflation to deflate at that pace this month.
Inflation in the services sector, which is closely tracked by Bank of England (BoE) officials, accelerated to 5% from 4.4% in December.
The impact of high inflation data is unlikely to be secularly positive for the British currency. BoE officials have already communicated in their latest monetary policy statement that price pressures could tick higher in the short term due to rising energy prices before returning to their 2% path.
On Monday, BoE Governor Andrew Bailey also said in an interview with BusinessLine that the impact of an expected increase in inflation won’t be “persistent,” and still sees the “gradual disinflation going on”. Bailey added that a “sluggish state” of the economy is also likely to “act against inflation”, Reuters reported.
However, an increase in inflationary pressures is expected to restrict the BoE from further monetary easing.
Going forward, investors will focus on the UK Retail Sales data for January and the preliminary S&P Global/CIPS Purchasing Managers Index (PMI) data for February, which will be released on Friday.
Daily digest market movers: Pound Sterling gains against USD ahead of FOMC minutes
- The Pound Sterling moves higher to near 1.2630 against the US Dollar (USD) in Wednesday’s European session. The GBP/USD pair rise as the US Dollar trades subduedly, with the US Dollar Index (DXY) wobbling around 107.00, ahead of the release of the Federal Open Market Committee (FOMC) minutes for the January meeting, which will be published at 19:00 GMT.
- Investors will focus on FOMC minutes for the January decision to get cues about how long the Federal Reserve (Fed) will keep interest rates steady in the range of 4.25%-4.50%. In the January meeting, the Fed announced a pause in its monetary expansion cycle after cutting interest rates by 100 basis points (bps) in the last three meetings of 2024. Fed Chair Jerome Powell guided that monetary policy adjustments would become appropriate when officials see “real progress in inflation or at least some weakness in the labor market”.
- On Tuesday, San Francisco Fed Bank President Mary Daly also favored a “restrictive” monetary policy stance until she sees a continuation in progress in the disinflation trend.
- Meanwhile, renewed fears of tariffs by United States (US) President Donald Trump could strengthen the US Dollar. President Trump said on Tuesday that he plans to impose 25% tariffs on imports of automobiles, semiconductors, and pharmaceuticals, which could increase further over the next year. This could lead to a slowdown in the global economy.
Technical Analysis: Pound Sterling stays above 1.2600
The Pound Sterling trades above the key level of 1.2600 against the US Dollar in European trading hours on Wednesday. The GBP/USD pair gathers strength to break above the 38.2% Fibonacci retracement, which coincides with the 100-day Exponential Moving Average (EMA), around 1.2620.
The 14-day Relative Strength Index (RSI) advances above 60.00. A bullish momentum would activate if the RSI (14) sustains above that level.
Looking down, the February 3 low of 1.2250 will act as a key support zone for the pair. On the upside, the 50% Fibonacci retracement at 1.2767 will act as a key resistance zone.
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, 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.