- The Pound Sterling faces pressure as geopolitical tensions improve the appeal for safe-haven assets.
- UK’s employment and inflation data will influence speculation over BoE rate cuts.
- The UK economy is on track to come out of a technical recession.
The Pound Sterling (GBP) shows a modest recovery against the US Dollar in Monday’s early New York session. However, the near-term demand of the GBP/USD pair remains downbeat due to deepening Middle East tensions and speculation that the Bank of England (BoE) will start reducing interest rates sooner than the Federal Reserve (Fed).
Currently, financial markets anticipate that the BoE will begin lowering borrowing costs from August while the Fed is expected to follow the same from the September meeting.
This week, the United Kingdom’s employment and inflation data will freshly guide market expectations for the BoE as markets wonder when it could start its much-awaited rate-cut cycle. Investors will keenly focus on the wage growth data for three months ending February, which will be released on Tuesday, as it remains a key driver to the UK’s stubborn price pressures.
Daily digest market movers: Pound Sterling remains on backfoot, focus shifts to UK Employment
- The Pound Sterling finds interim support after diving to a more than four-month low near 1.2430. Escalating Middle East tensions and receded bets that the Federal Reserve (Fed) will pivot to rate cuts in the June meeting have dented the appeal of risk-sensitive currencies.
- Hundreds of air strikes from Iran on Israel in retaliation to its attack on the Iranian embassy in Syria near Damascus, in which seven members of its Islamic Revolutionary Guard Corps (IRGC), including two generals, were killed, have spooked demand for risk-perceived currencies.
- Both scenarios—escalation in geopolitical tensions and faded Fed rate cut hopes—are favorable for the US Dollar, which is considered a safe-haven asset. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, hovers near a fresh five-month high at 106.10.
- Meanwhile, the upbeat United States monthly Retail Sales data for March strengthens the appeal of the US dollar. The Retail Sales data, representing households’ spending grew at a stronger pace of 0.7% from expectations of 0.3%.
- On the United Kingdom’s front, improved monthly Gross Domestic Product (GDP) numbers have relieved Bank of England (BoE) policymakers. As expected, the monthly GDP for February rose by 0.1%, confirming that the economy is on course to come out of a technical recession registered in the second half of 2023. The economy also expanded by 0.3% in January, revised higher from 0.2%.
- Due to the improving economic outlook, the BoE could maintain a restrictive policy until they gain confidence that inflation will sustainably return to the 2% target.
Technical Analysis: Pound Sterling struggles to recapture 1.2500
The Pound Sterling experiences a sharp sell-off after a breakdown of the psychological support at1.2500. The long-term trend of the GBP/USD pair has turned bearish as it has dropped below the 200-day Exponential Moving Average (EMA), which trades around 1.2570.
A breakdown of the Head and Shoulder chart pattern on a daily timeframe has indicated a bearish reversal. The neckline of the aforementioned chart pattern is plotted from December 8 low near 1.2500.
The 14-period Relative Strength Index (RSI) slips sharply below 40.00, indicating that a fresh bearish momentum has been triggered.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
