Pound Sterling rises to two week high as US Dollar slumps US inflation data

The Pound Sterling rises as market sentiment improves. Investors ignore uncertainty ahead of US inflation data
UK Retail Sales for food items rose sharply in March due to early Easter, while overall demand remains subdued.
The US inflation data for March will guide expectations for Fed rate cuts in June.

The Pound Sterling (GBP) moves higher against the US Dollar in Tuesday’s early American session. The GBP/USD pair gains as market mood remains risk-on despite uncertainty ahead of the United States Consumer Price Index (CPI) data for March, which will be published on Wednesday. The economic data will likely provide some clues about when the Federal Reserve (Fed) could start reducing interest rates.

The US Dollar drops ahead of the inflation data. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls slightly to the crucial support of 104.00.

Meanwhile, the appeal for the Pound Sterling slightly improves as surveys show that the United Kingdom economy will deliver modest growth this year after falling into a technical recession in the second half of 2023. The latest projections from the UK Office for Budget Responsibility (OBR) showed that the economy is forecast to grow by 0.8% this year. Domestic demand has rebounded while geopolitical tensions remain a major concern, resulting in supply chain disruptions, the OBR report said.

This week, investors will focus on the UK monthly Gross Domestic Product (GDP) and the factory data for February, which will be published on Friday. The data will give a snapshot of the state of the economy after the 0.2% GDP expansion registered in January. The breakdown among sectors will also provide data from the country’s manufacturing sector, which is considered a leading indicator for overall demand.

Daily digest market movers: Pound Sterling moves higher on risk-on mood

The Pound Sterling rises to 1.2700 against the US Dollar, with eyes on the United States Consumer Price Index (CPI) data for March, which will be published on Wednesday.
US Monthly headline and core inflation, which strips off volatile food and energy prices, are both forecasted to have risen at a slower pace of 0.3% from 0.4% in February. In the same period, economists expect the annual headline CPI to accelerate to 3.4% from 3.2%, while the core inflation is anticipated to decelerate to 3.7% from 3.8%.
The inflation data will provide cues about when the Federal Reserve will start reducing interest rates. Currently, market expectations lean towards the June policy meeting for the Fed pivoting to rate cuts. However, upbeat US Nonfarm Payrolls (NFP) data for March has shaken investors' confidence. Strong labor market data has strengthened the inflation outlook, allowing Fed policymakers to avoid consideration for rate cuts for now.
On the United Kingdom front, speculation about the Bank of England lowering interest rates from the June meeting has escalated. The UK’s inflation came in below expectations in the first two months of this year. Also, BoE Governor Andrew Bailey said two or three rate cut expectations this year are “reasonable.”
A significant fall in UK inflation is mainly driven by weak consumer spending. The British Retail Consortium (BRC) reported on Tuesday that robust spending on food items boosted Retail sales in March. Demand for food items rose due to early Easter, but the broader picture remains subdued as wet weather dented sales of other goods.
Meanwhile, the UK economic outlook improves as large businesses see economic uncertainty easing ahead. A survey by audit and consultancy firm Deloitte said that uncertainties driven by Brexit, the pandemic, and inflation that have clouded the business scene for much of the last eight years “seem to be clearing."

Technical Analysis: Pound Sterling jumps to 1.2700

The Pound Sterling advances to 1.2680 as an appeal for risk-sensitive assets improve. The GBP/USD trades back and forth around 1.2660, and remains inside Monday’s trading range. The 200-day Exponential Moving Average (EMA) near 1.2570 supports the Pound Sterling bulls.

On the downside, the psychological level of 1.2500 plotted from December 8 low will be a major support for the Cable.

The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.

Interest rates FAQs

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Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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