GBP started the week on the back foot against USD. It has a further decline as it faced continued economic headwinds. Market participants are getting ready for the upcoming important Consumer Price Index (CPI) data out of the United Kingdom and United States. Analysts are already paying close attention to how this new information will change the reaction of currencies to currency movements. Later on Wednesday, the UK will release its CPI data. Then on Friday, the US releases its data that could change the trading patterns even more.
The Pound Sterling is the fourth most actively traded currency in the world. Today, it accounts for less than 12% of all foreign exchange transactions. In 2022, it was the third-largest cryptocurrency by market capitalization, averaging $630 billion a day in trading volume. Due to this, changes in its value can have far-reaching consequences on global markets.
Market Dynamics and Current Trends
After a spectacular performance these last few trading sessions, the US Dollar Index (DXY) stood firmly in positive territory trading 0.25% higher at just under 98.85. This increase is indicative of a more bullish outlook for the US Dollar owing to heightened expectations for inflationary pressures in both countries. The 14-day Relative Strength Index (RSI) for Pound Sterling moves between 40.00 and 60.00. This trend suggests a flattening trend with no evident trend overall up or down.
Market analysts are anticipating a record increase in inflation across the UK economy for the month of September. They highlight the four key factors that are fueling this hike. This expectation poses a difficult challenge to the Bank of England. It needs to walk a tightrope of rising price pressures at the same time as facing a cooling labor market.
“What has transpired is that the labour market has modestly loosened but it is not falling off of the cliff” – Catherine Mann.
The Bank of England now risks being caught on the wrong side of history with its monetary policy. As long as inflation remains high, some action might be needed, but the labor market is still increasingly exhibiting signs of softening.
Upcoming CPI Data and Its Implications
Meanwhile, on the other side of the Atlantic the US is gearing up for a big inflation number. Currently consensus figures from analysts expect the headline CPI to come in at an increase of 3.1% vs the last reading of 2.9%. Core CPI, which strips out volatile food and energy costs, is set to jump to 3.7%. That’s up from 3.6% in August. This rise in inflation might lead to discussions of future tightening monetary policy from the Federal Reserve.
Traders and investors should be on red alert during the next few CPI prints. These reports will provide invaluable information on economic health and guide possible interventions from central banks. If inflation comes in stronger than expected this would add more fuel to the US Dollar fire likely to make life even more difficult for Pound Sterling.
Technical Analysis and Market Sentiment
As it stands today, Pound Sterling has a hard time recovering above its 20-day Exponential Moving Average, which is floating around 1.3417. The psychological mark of 1.3500 serves as a key resistance point for the GBP/USD currency pair. Traders are remaining risk averse and reluctant to bid prices up. On the flip side, the August 1 low of 1.3140 serves as an important support area for this currency pair.
As markets continue to digest upcoming economic data and recalibrate inflationary trends, volatility is likely to continue running high. Traders should be on the lookout, because a change in the direction of key economic indicators could result in sharp moves in currency valuations.