The GBP/USD pair edged higher to around 1.3405 in early Asian trade on Wednesday, as the US dollar slipped against sterling following softer‑than‑expected US inflation data for June, which eased expectations of further Federal Reserve tightening. Market attention now turns to the upcoming US June Producer Price Index (PPI) release later today.
According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 3.5% year‑on‑year in June, down from 4.2% in May and below the forecast of 3.8%. On a month‑over‑month basis, headline CPI fell 0.4%, contrasting with a 0.5% increase in the previous month.
Core CPI, which strips out food and energy, remained flat month‑over‑month and increased 2.6% year‑on‑year, compared with a 2.9% rise in May and the consensus estimate of 2.8%.
The softer inflation readings prompted traders to scale back expectations of a July Fed rate hike; the probability dropped from 42% on Monday to 16% according to the CME FedWatch tool, although the likelihood of at least one hike this year remains at 80%, down from 89% a day earlier.
Federal Reserve Chair Kevin Warsh commented on Tuesday that the central bank has “no tolerance for persistently elevated inflation,” adding that he did not view the CPI report as a sign that all is well.
Conversely, investors increased their bets on a more aggressive tightening path by the Bank of England after rising oil prices rekindled inflation worries. Markets now fully price a 25‑basis‑point BoE rate increase by September, with another hike expected before year‑end, per Bloomberg.
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.
