GBP/USD flattens as markets await key midweek data

GBP/USD pulled into the middle on Monday as markets quiet back down.
Near-term volatility spikes have given way to easy waters.
Key UK and US inflation data lie ahead in the middle of the week.

GBP/USD continued to flatten out on Monday, trading in place and testing key technical levels as markets buckle down for the wait to a midweek inflation data outing. Recent volatility that saw Cable drop back to long-run averages below 1.2700 have eased into the background for now, and investors will be pivoting to face a round of key inflation prints on both sides of the Atlantic due in the midweek.

Forex Today: UK jobs report and US Producer Prices… for starters

US Producer Price Index (PPI) business-level inflation figures are due on Tuesday. The forecast indicates a decrease in core PPI to 2.7% from 3.0%. On Wednesday, YoY core CPI inflation is expected to drop to 3.2% from 3.3%. Market sentiment relies on a balanced inflation outcome for equities to perform well.

On the UK side, an easy Monday gives way to a packed economic release calendar, with UK unemployment claims on Tuesday and UK CPI inflation slated for Wednesday. Core UK CPI inflation is expected to tick down to 3.4% YoY from 3.5%, while headline CPI inflation is forecast to rise to 2.3% YoY from 2.0%.

Economic Indicator

Claimant Count Change

The Claimant Count Change released by the UK Office for National Statistics presents the change in the number of unemployed people in the UK claiming benefits. There is a tendency for the metric to influence GBP volatility. Usually, a rise in the indicator has negative implications for consumer spending and economic growth. Generally, a high reading is seen as bearish for the Pound Sterling (GBP), while a low reading is seen as bullish.

Why it matters to traders?

The change in the number of those claiming jobless benefits is an early gauge of the UK’s labor market. The figures are released for the previous month, contrary to the Unemployment Rate, which is for the prior one. This release is scheduled around the middle of the month. An increase in applications is a sign of a worsening economic situation and implies looser monetary policy, while a decrease indicates improving conditions. A higher-than-expected outcome tends to be GBP-bearish.

GBP/USD price forecast

Cable continues to tease a bearish fall back into the 200-day Exponential Moving Average (EMA) at 1.2649, but bidders have thus far stepped up to keep bids from falling any closer toward the 1.2600 handle. However, bullish momentum has evaporated as GBP/USD remains down over 2% from 12-month peaks just above 1.3000 set in July.

GBP/USD daily chart

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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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