As of Wednesday morning, the Pound Sterling is tumbling against the US Dollar. After the recent release of disappointing UK inflation figures, it traded below 1.3100. This drop serves to underscore the quite bearish picture for GBP/USD. It continues to hover under the key 200-day Exponential Moving Average (EMA), which is about 1.3264. The lagging strength of the British currency comes even as the Dollar enjoys a relatively period of international monetary stability.
According to market analysts, October 28 high near 1.3370 will serve as the major resistance point on the way of GBP/USD. On the other hand, the April low close to 1.2700 should offer key support if the currency pair starts falling further. Underlying the pound-to-dollar dynamics are bigger economic fears, especially over inflation and wage growth in the UK.
UK Inflation Data Impact
According to today’s UK inflation report, headline Consumer Price Index (CPI) rose 0.4% this month. That’s the biggest break in direction since a sideways movement that lasted throughout much of September. This is the currency that the Bank of England (BoE) works in. They assist the central bank in keeping inflation levels close to its 2 percent target. With food and energy stripped out—always a contentious choice, but that’s how the Fed measures it—core CPI was up a reasonable 3.4%. That’s down from last month’s 3.5% reading. This drop in inflation numbers has come amid growing alarm over the state of the country’s economy.
The services sector showed signs of inflation cooling, falling to 4.5% from 4.7% in September. Analysts view this data as the smoking gun. As inflationary pressure remains weak, the BoE will likely have to look through the need for interest rate cuts.
“I am hearing that firms are paying for AI investment by not hiring, and firms say low-and-middle income households are not spending, hitting hiring, which makes case for continuing interest rate cuts,” – Christopher Waller.
As inflation rates remain subdued, economists predict that the BoE might reevaluate its monetary policy stance, especially given that the unemployment rate holds steady at 4.3%.
Currency Trends and Market Reactions
Meanwhile, the GBP/USD currency pair is still finding it difficult to return to bullish momentum. The 14-day Relative Strength Index (RSI) is struggling to remain above the 40.00 level. A move under this region would be a clear indication of a new bearish trend, leading to additional losses for the Pound. The market tends to overreact to these economic indicators. Should the currency persistently weaken, it will create additional policy embarrassment.
At the same time, the US Dollar has shown little concern with an important upcoming labor market report. Employment economists predict US employers created some 50,000 net new jobs in September. That’s a big leap from August’s net zero total of 22,000. A hawkish surprise on this positive labor market outlook could further bolster the US Dollar, resulting in heightened downward pressure on GBP/USD.
This one-two punch of stagnant wage growth and high cost-of-living is creating a perfect storm for many UK households. Average Hourly Earnings figures should continue to grow at a healthy clip, rising by 0.3% month-on-month and 3.7% year-on-year. These benefits may fall short of offsetting the impact of increasing inflation.
Future Outlook for GBP/USD
Market participants will closely monitor upcoming economic data releases and any statements from Bank of England officials regarding potential interest rate adjustments. The interplay between inflation figures and wage growth will play a pivotal role in shaping monetary policy decisions moving forward.
Traders are looking at the strong 1.3370 resistance level. If GBP/USD is able to break above this resistance, it would be a strong signal that the pair has reversed these recent bearish trends. Conversely, if the currency pair approaches the April low around 1.2700, it may prompt further concern regarding the health of the UK economy.