Prior to the release of November inflation data in the United States, the pound fluctuated narrowly against the dollar around 1.2750.
Economists expect the Federal Reserve to cut interest rates by 25 basis points after its policy meeting on December 18th.
Investors are waiting for monthly GDP data from the UK to obtain clues about the current economic situation.
During Wednesday's European session, the pound sterling (GBP) traded narrowly against the US dollar (USD) around 1.2750. The GBP/USD currency pair is consolidating as investors seem to be watching ahead of the release of the US Consumer Price Index (CPI) data for November at 13:30 Greenwich Mean Time.
It is expected that this inflation report will show that the overall consumer price index for the year will accelerate from the previously released 2.6% to 2.7%. The core CPI (excluding volatile food and energy prices) is expected to steadily rise to 3.3%. The monthly overall and core consumer price index is expected to increase by 0.3%.
Unless the data deviates significantly from expectations, inflation data is unlikely to affect the interest rate expectations of the Federal Reserve's (Fed) policy meeting on December 18th.
According to the latest Reuters poll, 90% of economists expect a 25 basis point (bps) interest rate cut next week. The poll also shows that most economists expect the Federal Reserve to pause its policy easing frenzy from its first policy meeting in January 2025, provided that President elect Donald Trump's policies of raising import tariffs and lowering tax rates will lead to inflation.
Like the US dollar, the pound is also struggling to find direction against other major currencies in the UK's sluggish economic calendar. Therefore, the UK currency will be influenced by market expectations of the interest rate action that the Bank of England (BoE) may take at its policy meeting on December 19th. Traders expect that due to ongoing price pressure, the Bank of England will keep interest rates unchanged at 4.75% next week. Prior to the Bank of England's policy decision, employment data for the three months ending in October and Consumer Price Index (CPI) data for November will be released, which may affect the Bank of England's interest rate expectations. At the same time, growing concerns about the strength of the UK labor market may force Bank of England officials to issue dovish interest rate guidance. A recent survey by the Bank of England's Decision Making Group (DMP) shows that the one-year forward employment growth forecast has fallen to a four-year low. Later this week, investors will focus on the UK's monthly Gross Domestic Product (GDP) and industrial and manufacturing production data for October. GDP and factory data will display the current state of economic health. Economists predict that factory and GDP data will expand after a decline in September.
The pound is striving to regain the key resistance level of 1.2800 against the US dollar. The GBP/USD exchange rate is slightly above the 20 day moving average (EMA) around 1.2720.
The 14 day Relative Strength Index (RSI) oscillates within the range of 40.00-60.00, indicating a bearish trend.
Looking down, the GBP/USD is expected to find a buffer near the upward trend line around 1.2500, which was drawn from the October 2023 low of 1.2035. On the upside side, the 200 day moving average of the index around 1.2830 will become a key resistance.
The British pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. According to 2022 data, it is the fourth largest foreign exchange trading unit in the world, accounting for 12% of all transactions and averaging $630 billion per day. Its main trading pairs are GBP/USD, also known as "Cable", accounting for 11% of forex, GBP/JPY, also known as "Dragon" by traders (3%), and EUR/GBP (2%). The pound is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound is the monetary policy determined by the Bank of England. The decision of the Bank of England is based on whether it has achieved its main goal of "price stability" - a stable inflation rate of around 2%. The main tool to achieve this goal is to adjust interest rates. When inflation is too high, the Bank of England will attempt to control inflation by raising interest rates, thereby increasing the cost of credit for individuals and businesses. This is generally favorable for the pound as higher interest rates make the UK a more attractive investment destination for global investors. When inflation drops too low, it is a sign of slowing economic growth. In this situation, the Bank of England will consider lowering interest rates to lower credit costs, so that businesses can borrow more funds and invest in projects that promote growth.
The published data can measure the health of the economy and may affect the value of the pound. GDP The PMI of manufacturing and service industries, as well as employment indicators, can all affect the trend of the pound. A strong economy is beneficial for the pound. This will not only attract more foreign investment, but may also encourage the Bank of England to raise interest rates, which will directly push up the pound. Otherwise, if economic data is weak, the pound may fall.
Another important data for the pound is the trade account. This indicator measures the difference between a country's export revenue and import expenditure during a certain period of time. If a country produces highly popular export products, its currency will purely benefit from the additional demand created by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance will strengthen the currency, and vice versa.