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- The GBP/USD pair recorded a decline for the fourth consecutive week.
- Despite early losses, Cable managed to regain some ground late in the week.
- Next week: UK and US CPI inflation updates.
GBP/USD closed the fourth consecutive week in the red, closing down around four-tenths of a percent despite a late-week recovery from lows below 1.2700. A weaker UK economic calendar gave GBP traders breathing room after the Bank of England (BoE) sparked a broad market meltdown in the pound. Market flows have since rebalanced, with investors now turning to next week’s CPI inflation data from both sides of the Atlantic.
Predicting the next week: US CPI and Fed easing expected to control sentiment
Market focus is on the possibility of interest rate cuts by Federal Reserve In September. Interest rates markets have priced in the start of the rate-cutting cycle when the Federal Open Market Committee meets on September 18. However, expectations for an initial double-digit 50 basis point cut have diminished slightly from around 70% earlier this week. According to the CME’s FedWatch tool, interest rate traders are pricing in a 53.5% chance of a 50 basis point cut in September, with two more 25 basis point cuts expected through the rest of 2024.
Next week, investors will have fresh inflation data to consider, with the US PPI and CPI due out on Tuesday and Wednesday, respectively. US retail sales and the University of Michigan Consumer Sentiment Survey update are also expected later next week. Both core PPI and headline CPI inflation are currently hovering around 3% y/y, and investors will be looking for further easing in the headline numbers to support the case for a rate cut by the Fed.
UK CPI inflation is expected to rise to 2.3% year-on-year in July from 2.0% previously, while core CPI inflation figures climate forecast UK economic growth is expected to slow to 3.4% from 3.5%. UK GDP growth figures are also expected later next week, and UK Q2 GDP growth figures are also expected. gross domestic product Inflation is expected to decline to 0.6% from 0.7% previously.
GBP/USD Price Forecast
The British pound continues to retreat towards the 200-day exponential moving average (EMA) at 1.2649, but buyers have so far stepped in to prevent a drop towards the 1.2600 level. However, the upward momentum has evaporated as the GBP/USD pair remains more than 2% below its 12-month highs above 1.3000 hit in July.
GBP/USD Daily Chart
Frequently Asked Questions About Sterling
The British pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit in the world’s foreign exchange (FX) market, accounting for 12% of all transactions, with an average of $630 billion per day, according to 2022 data. The main trading pairs are GBP/USD, also known as the “cable”, which accounts for 11% of the FX market, GBP/JPY, or “the dragon” as traders know it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most important factor that affects the value of the pound is the monetary policy set by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary goal of “price stability” – a stable inflation rate of around 2%. Its primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it harder for people and businesses to access credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England will consider cutting interest rates to reduce credit so that businesses will borrow more to invest in growth-generating projects.
Data released measures the health of the economy and can affect the value of the pound. Indicators such as GDP, manufacturing and service PMIs, and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, it may encourage the Bank of England to raise interest rates, which would directly boost the pound. Otherwise, if economic data is weak, the pound is likely to fall.
Another important piece of data relating to the pound is the trade balance. This measure measures the difference between what a country earns from its exports and what it spends on imports over a given period of time. If a country produces highly demanded exports, its currency will benefit purely from the additional demand generated by foreign buyers seeking to purchase these goods. Thus, a positive net trade balance strengthens the currency and vice versa for a negative balance.
