The GBP/USD pair is trading in negative territory around 1.3425 during Asian trading hours on Wednesday, under pressure from renewed demand for the US Dollar (USD). Traders brace for US retail sales and producer price data later on Wednesday.
The US Consumer Price Index (CPI) rose 2.7% year over year in December, matching the increase recorded in November, the US Bureau of Labor Statistics (BLS) said on Tuesday. This number is in line with the market consensus. Meanwhile, the core CPI, excluding volatile food and energy costs, rose 2.6% year-on-year in December, versus November’s 2.7% rise. This reading was lower than expected at 2.7%.
“The initial excitement sparked by the lower-than-expected core CPI was short-lived,” said Jose Torres of Interactive Brokers. “The reversal was influenced, in part, by the report’s failure to postpone the next expected rate cut from June to April, with fixed income watchers expecting Powell’s December cut to be his last at the helm of the bank.”
Renewed concerns about the independence of the Federal Reserve could lead to a decline in the dollar. The Federal Reserve has received subpoenas from the Justice Department over statements it made to Congress last summer regarding cost overruns for a $2.5 billion building renovation project at the central bank’s headquarters in Washington, Federal Reserve Chairman Jerome Powell said Sunday. Powell called the threats a “pretext” to pressure the Fed to lower interest rates.
However, a dovish stance from the Bank of England could undermine GBP/USD. The Bank of England (BoE) cut its interest rate to 3.75% at its policy meeting in December, and is expected to implement further cuts in 2026 as inflation eases, although officials indicate future decisions will be “closer calls”. Many analysts believe that the British central bank will keep interest rates steady in February, with the next 0.25% cut likely to take place in March or April this year.
Questions and answers about the pound sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most popular foreign exchange (FX) trading unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to data for 2022. The main trading pairs are GBP/USD, also known as “Cable”, which accounts for 11% of FX, GBP/JPY, or “Dragon” as traders know it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary objective of “price stability” – a stable inflation rate of around 2%. The primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it more expensive for individuals and businesses to obtain credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to reduce the cost of credit so that companies borrow more to invest in growth-generating projects.
Data releases measure the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing PMIs, services and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the British pound is likely to fall.
Another important data release for the British Pound is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly sought-after exports, its currency will take full advantage of the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
