GBP/USD buoyed by soft US PPI despite UK unemployment spike
|- GBP/USD gained three-quarters of a percent on Tuesday.
- Softening US PPI inflation figures pelted the Greenback lower.
- UK unemployment claims soared to its highest level since the pandemic.
GBP/USD rallied into a two-week high on Tuesday, rising to a session peak of 1.2873 after market sentiment found the buy button. US Producer Price Index (PPI) inflation cooled more than expected, prompting a rush of bets into a higher pace of rate cuts from the Federal Reserve (Fed) in September, while Cable traders shrugged off a multi-year peak in UK unemployment claims.
Forex Today: Rate cut expectations look at US inflation data
Consumer Price Index (CPI) inflation figures are due on Wednesday on both sides of the Atlantic. Core UK CPI inflation is expected to tick down to 3.4% YoY in July from 3.5%. On US side, markets are banking on a continued cool-off in US inflation figures, with core US CPI for the year ended in July forecast to ease to 3.2% from the previous 3.3%.
Despite a broad-market pivot into hopes for a Fed rate cut on the back of easing inflation figures, the UK is staring down the barrel of a decaying employment landscape. July’s Claimant Count Change registered 135K new unemployment benefits seekers, nearly ten times the forecast 14.5K and more than quadrupling the previous month’s figure of 32.3K. It is the single-worst print of UK unemployment claims since the 2020 pandemic shuttered most of the country, and Pound Sterling traders will be looking ahead to Friday’s upcoming UK Gross Domestic Product (GDP) print with more trepidation than expected.
US PPI inflation eased to 2.2% YoY in July, falling below the expected 2.3% and declining even further from the previous period’s revised 2.7%. Core PPI inflation also declined to 2.4% for the year ended in July, dropping below the forecast 2.7% and falling well below the previous 3.0%. Continued declines in US inflation pressure bolstered risk appetite in the US market session, and market bets of a 50 basis point double-cut in September from the Federal Reserve (Fed) rose to 55%, according to the CME’s FedWatch Tool.
GBP/USD price forecast
GBP/USD is extending a recovery rally after a technical bounce from the 200-day Exponential Moving Average (EMA) last week near 1.2675. Bulls remain in control of the technical charts, but Cable has yet to pierce and recover the 1.2900 handle that was lost in mid-July.
The long-term trend favors bidders as weakness in the Greenback send the Pound Sterling higher, and a long-run technical pattern of higher lows is keeping bullish momentum on the high side.
GBP/USD daily chart
Pound Sterling FAQs
The Pound Sterling (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 for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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