The Pound Sterling continued to trade defensively within Monday’s range. On Tuesday’s European trading session, it remained strong above 1.3160 vs the US Dollar. Market function has been stable so far, but we await final resolution coming from further UK inflation data. This new data could fundamentally shape the Bank of England’s decisions regarding monetary policy. Public interest analysts are watching these moves closely. Beyond the daily chart, the broader trend for the GBP/USD exchange remains firmly on the bearish side, with the currency pair trading under the key 200-day Exponential Moving Average (EMA) near 1.3276.
The market is eagerly awaiting next week’s Consumer Price Index (CPI) report. Analysts are widely looking for a decline in the PCE deflator, to 3.6% y/y from 3.8% in September. Core CPI, which cuts out the potentially more volatile food and energy indexes, is expected to slow slightly. It’s forecast to tick lower to 3.4% from last month’s 3.5% print. The figures will inevitably become a political football. Investors are most focused on how these figures might impact the BoE’s monetary policy decision in their December meeting.
Market Performance and Trends
It is the fourth most traded currency in international foreign exchange markets, making the Pound Sterling one of the world’s major currencies. It comprises 12% of all transactions and averages an astounding $630 billion in daily trading, according to 2022 figures. The GBP/USD – sometimes referred to as ‘Cable’ – constitutes 11% of FX transactions and is one of its primary trading pairs. It includes GBP/JPY, or the ‘Dragon’ at 3%, and EUR/GBP at 2%.
Throughout Tuesday’s trading day, the GBP/USD currency pair was largely capped within a tight range. That overall bearish trend remains as it continues to trade below those key technical levels. Even the 14-day Relative Strength Index (RSI) is struggling to remain above the 40.00 overbought threshold. If it breaks down below this threshold, we may witness fresh downside impetus for the currency.
The market continued to digest the very bad economic news that came out last week. Among them was the labour market data in which the Unemployment Rate skyrocketed to 5%. This surprise leap increases worries about economic stability and may affect U-turn by BoE on policy direction in the coming months.
Anticipation Surrounding CPI Report
Investors’ interest is certainly laser-focused on next week’s CPI print. Looking ahead, expectations are that headline inflation will rise by 0.4% month-to-month following a 0.0% change in September. Headline and core inflation rates are both coming down. This trend is a promising sign that the BoE might feel confident enough to start turning back towards monetary easing come December.
Recent comments from economic leaders reinforce the fascinating idea that we absolutely need to keep inflation on a tight rein. Fed Vice Chair Philip Jefferson has remarked on the necessity for policies that “stop putting downward pressure on inflation.” Such comments may be lamenting that the lack of enforcement makes sense given global economic conditions. They are set to shape investor perceptions of UK monetary policy going forward.
“The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy.” – Fed Vice Chair Philip Jefferson
Market Support and Resistance Levels
Traders are increasingly watching key Pound Sterling support/resistance levels. The April low around 1.2700 serves as an important support area. On the other hand, the October 28 peak at roughly 1.3370 remains immediate resistance for further appreciation. A break under the April low would send a signal to traders and could spur even more bearish sentiment. Conversely, a rally above the October high would negate the bearish formation seen above.
Interest rates are one of the most important factors in currency value. Because the market is largely an international one, elevated rates usually make the UK market more attractive to international investors. This backdrop highlights how inflation surprises can affect investor behavior and further market conditions.