The British Pound Sterling is trading near a seven-week low against a strengthening U.S. Dollar, with the GBP/USD pair hovering around the 1.3330 mark. Market participants are exercising caution ahead of the release of key United States inflation data, which could influence the Federal Reserve's future interest rate decisions.
Key Takeaways
- The Pound Sterling (GBP) is under pressure, trading near its lowest point in seven weeks against the U.S. Dollar (USD).
- Investors are focused on the upcoming U.S. Personal Consumption Expenditure (PCE) Price Index, the Federal Reserve's preferred inflation metric.
- Recent strong U.S. economic data, including revised GDP growth of 3.8% for Q2, has bolstered the Dollar.
- In the UK, a Bank of England policymaker has warned of persistent inflation, suggesting interest rates may remain steady.
Focus Shifts to U.S. Inflation Report
The primary driver for currency markets on Friday is the anticipated release of the U.S. Personal Consumption Expenditure (PCE) Price Index for August. This report, scheduled for 12:30 GMT, is closely watched as it is the Federal Reserve's main gauge for inflation.
Analysts are forecasting that the core PCE, which excludes volatile food and energy items, grew by 0.2% on a monthly basis. This would be a slight moderation from the previous month's 0.3% reading. On an annual basis, the figure is expected to remain steady at 2.9%.
Why the PCE Report Matters
The PCE Price Index measures changes in the prices of goods and services purchased by consumers. Unlike the more commonly known Consumer Price Index (CPI), the PCE accounts for substitutions consumers make when prices change, providing what the Fed considers a more comprehensive view of inflation.
The outcome of this report will be critical for shaping market expectations regarding future monetary policy. A lower-than-expected inflation reading could increase the likelihood of further interest rate cuts by the Fed this year. Conversely, a strong inflation number would support the view of officials who advise caution on additional cuts, potentially strengthening the U.S. Dollar further.
Divergent Central Bank Policies
The current pressure on the GBP/USD pair is amplified by the differing outlooks of the U.S. Federal Reserve and the Bank of England (BoE).
Federal Reserve's Cautious Stance
The Federal Reserve implemented its first interest rate cut last week, reducing the benchmark rate by 25 basis points to a range of 4.00%-4.25%. However, recent economic signals have led to a re-evaluation of how much further the central bank might go.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 50 basis points by the end of the year has decreased to 62%, down from 78.6% just a week ago.
This shift in sentiment has been fueled by robust economic data. On Thursday, revised figures showed the U.S. economy grew at an annualized rate of 3.8% in the second quarter, surpassing the initial estimate of 3.3%. Additionally, initial jobless claims for the week ending September 20 were lower than anticipated at 218,000, signaling continued labor market strength.
Bank of England Grapples with UK Inflation
In contrast, the Bank of England is widely expected to keep its interest rates steady at 4.0% for the remainder of the year. The primary reason is the persistent nature of inflation within the United Kingdom's economy.
Megan Greene, a member of the BoE's Monetary Policy Committee (MPC), recently highlighted these concerns. Greene, who has voted to hold rates steady in the last two meetings, warned of upside risks to inflation and advised against loosening monetary policy prematurely.
“Trade risks have abated, and we [BoE] expect growth to 'rebound', which won’t lead labour market risks materializing,” Greene stated, suggesting an economic recovery is likely.
Her comments indicate a belief that the negative impacts of global trade disputes are fading. This view, however, slightly contrasts with the BoE's official statement from last week, which projected that consumer inflation would peak around 4% in September.
Technical Outlook for GBP/USD
From a technical standpoint, the Pound Sterling's position against the U.S. Dollar appears weak. The currency pair is struggling to find support after recently breaking below a key technical pattern.
The GBP/USD pair has experienced a breakdown of its Rising Channel formation, which often signals a bearish reversal and a shift in market momentum from upward to downward. This move suggests that sellers are gaining control.
Further reinforcing the bearish outlook, the pair is trading below its 20-day Exponential Moving Average (EMA), which is currently around 1.3488. Traders often view sustained trading below this moving average as a sign of a short-term downtrend.
Key Levels to Watch
The 14-day Relative Strength Index (RSI), a momentum indicator, has fallen below the 40.00 level. If the RSI remains below this threshold, it could indicate the emergence of fresh bearish momentum.
- Support: The next significant support level for the GBP/USD pair is the low from August 1, located at 1.3140. A break below this level could open the door for further losses.
- Resistance: On the upside, any recovery attempt would likely face a significant barrier at the psychological level of 1.3500.
The combination of fundamental factors, including the strong U.S. economy and the upcoming PCE data, alongside the bearish technical signals, suggests the Pound Sterling may remain under pressure in the near term.
