GBP Sterling slides against US Dollar as the week starts. This fight is a striking example of the current tempestuousness in the currency market. Market participants will be closely monitoring this Wednesday’s UK inflation data. They expect it to provide useful clues about potential interest rate hikes from the Bank of England (BoE). The GBP/USD, sometimes known as ‘Cable’, is holding a narrow band just above 1.3425. Yet it has been losing its sense of purpose as US Dollar fortunes level off and the US-China trade war thaw.
As recently as the start of this week, GBP/USD accounted for nearly 11% of the entire foreign exchange (FX) market. That really drives home how important it is in terms of global trading. Since then the Pound has continued to find itself on the back foot against its major peers. Investors are treading cautiously ahead of Wednesday’s Consumer Price Index (CPI) data release. The dynamics surrounding GBP/USD are largely influenced by market expectations regarding UK economic indicators and their implications for future monetary policy.
Current Market Dynamics
Market participants have been focusing their attention on the GBP/USD currency pair. At the time of writing, it’s on the powerful push to breakout beyond its 20-day Exponential Moving average (EMA) of 1.3423. The index has come to be seen as a barometer for short-term price trends. Any sustained movement above it might indicate a potentially bullish long-term trend for the Pound.
The 1.3140 low from August 1st appears as an important support area for GBP/USD. If the pair breaks below this level, it may trigger further downside pressure. This would only further exacerbate the existential crisis facing the pound sterling. The psychological barrier at 1.3500 hangs heavy over GBP/USD. Traders are already extremely aware of this major obstacle.
On the momentum front, the 14-day Relative Strength Index (RSI) for GBP/USD continually bounces around between 40.00-60.00. This represents a consolidating move, pointing to a continued lack of conviction from traders as to which way this currency pair is headed long-term. This absence of clear action only highlights the ambivalence felt across the market.
Focus on Upcoming Inflation Data
UK inflation data on Wednesday is set to take center stage in the economic calendar this week. Market participants are positioning themselves for its likely impact on GBP/USD. The BoE’s policy-setting meeting minutes from September pointed to a consensus belief that inflationary pressures have indeed peaked at about 4%. Traders are trying to determine the bottom line impact of the recent labor market data. This might continue to prevent worries from surfacing, despite a positive picture for GBP/USD moving forward.
The September labor market report for the three months ending in August pointed to a slowing in wage growth and an increase in the jobless rate. Fewer traders have become convinced that the BoE may need to raise borrowing rates once more this year. Such worry would place further strain on the Pound. More important, it sows confusion ahead of the next high inflation surprise.
“I think we’re going to be fine with China, but we have to have a fair deal. It’s got to be fair.” – US President Trump
Similarly, such statements from key figures, including US President Trump, on UK/US trade relations would shape investor perception for GBP/USD. So far, easing trade frictions China-US has served to stabilize the US Dollar. This latest development adds to what has become a very complicated and bearish outlook for the GBP vs its American counterpart.
Broader Implications for GBP
The GBP is the fourth most widely traded currency in the world, accounting for around 12% of all foreign exchange transactions. Its performance has a huge ripple effect on international markets. Daily trading volumes are incredible at an average of $630 billion per day. Market participants tend to pay close attention to the crown jewels—GBP/USD, GBP/JPY—known affectionately as ‘Dragon,’ and EUR/GBP.
This is a telling illustration of the pressure on Pound Sterling. It particularly flounders in a fast-changing, complicated environment rife with technical economic indicators and far-reaching geopolitical factors. The first CPI data next month will have an outsized impact on what the market expects. Most importantly, it will impact the Bank of England’s forthcoming monetary policy decisions for the reminder of 2023.