- The Pound Sterling refreshes a weekly low near 1.2670 amid a risk-averse mood.
- The UK Inflation data will influence market expectations for BoE rate cuts in August.
- Investors see the Fed and the BoE holding interest rates at their current levels.
The Pound Sterling (GBP) continues its losing streak for the fourth trading session on Tuesday as investors turn risk-averse in a big central banks’ week. The GBP/USD pair prints a fresh weekly low ahead of the interest rate decisions by the Federal Reserve (Fed) and the Bank of England (BoE). As both central banks are anticipated to maintain the status quo, investors will majorly focus on clues about the interest rate outlook.
In the United Kingdom, investors will scrutinize the BoE’s monetary policy statement to look for any cues about the timing for interest-rate cuts. UK headline inflation has come down significantly from the double-digit figures to 4%, mainly because the BoE has raised and kept interest rates at high levels for more than two years. Maintaining higher interest rates has also led to a sharp decline in economic growth, uplifting expectations for rate cuts in August.
Before the BoE policy decision, market participants will focus on the UK Consumer Price Index (CPI) data for February, which will be published on Wednesday. Expectations for the BoE to lower interest rates sooner could escalate if the inflation data turns out softer than expected. On the contrary, stubborn data will deepen uncertainty over rate cuts. The Pound Sterling tends to strengthen when inflation data comes in higher than expected, suggesting BoE policymakers will maintain a hawkish narrative.
Daily digest market movers: Pound Sterling falls on dismal market mood
- The Pound Sterling drops below the round-level support of 1.2700 as dismal market sentiment has dampened the appeal of risk-sensitive assets. The risk appetite of investors has diminished ahead of a slew of central bank meetings this week. “Investors are uncertain that the Fed will start cutting rates in June, as markets previously widely expected, due to recently hot inflation data. This has weakened the appeal for risk assets.
- The demand for safe-haven assets has improved significantly. The US Dollar Index (DXY), which measures the US Dollar’s value against six rival currencies, continues its winning streak for the fourth trading session on Tuesday. The USD Index jumped to 104.00 on hopes that the Fed will maintain hawkish rhetoric after keeping interest rates unchanged in the range of 5.25%-5.50% on Wednesday
- This week, the Pound Sterling will be guided by the Bank of England’s interest rate decision, which will be announced on Thursday. The BoE is widely anticipated to keep interest rates unchanged at 5.25%. Therefore, investors will keenly focus on cues about when the BoE is expecting to start reducing interest rates. Currently, the market expects the BoE to begin reducing interest rates in its August policy meeting.
- The market expectations for a rate cut in August are expected to be influenced by the United Kingdom CPI data for February, which will be announced on Wednesday. The annual headline inflation is forecast to have fallen to 3.6% against 4.0% in January. In the same period, core inflation – which excludes volatile food and energy prices – is forecast to have decelerated to 4.6% from 5.1%. For the monthly headline CPI, economists have forecasted a sharp growth of 0.7% after declining by by 0.6% in January.
Technical Analysis: Pound Sterling prints a fresh weekly low at 1.2670
The Pound Sterling falls below the breakout region of the Descending Triangle formed around 1.2700. The near-term demand for the GBP/USD pair has turned uncertain as it has dropped below the 20-day Exponential Moving Average (EMA), which trades around 1.2730.
On the downside, the downward-sloping border of the Descending Triangle chart pattern could support the Pound Sterling. On the upside, a seven-month high at around 1.2900 will be a major barricade.
The 14-period Relative Strength Index (RSI) returns to the 40.00-60.00 range, indicating a sharp volatility contraction.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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