Pound Sterling recovers against US Dollar after PPI-induced sell-off
- The Pound Sterling edges up slightly against the US Dollar, after the recent rally halted around 1.3600 due to hot US PPI data.
- Tariffs led US producer inflation to grow at the fastest pace in three years, supporting the US Dollar.
- Investors await the US Retail Sales data and the Trump-Putin meeting.
The Pound Sterling (GBP) recovers slightly to near 1.3540 against the US Dollar (USD) on Friday, paring back some of the losses seen on Thursday, when the US Dollar (USD) bounced back strongly after the United States (US) Producer Price Index (PPI) report for July showed that wholesale prices rose at the strongest pace in three years.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks down to near 98.05. Still, it broadly holds the Thursday’s recovery move, which came near the two-week low around 97.60.
Headline and the core PPI – which excludes volatile food and energy items – rose by 0.9% on a month, after remaining flat in June. Hot US PPI data indicate that business owners are reluctant to absorb the impact of tariffs and are passing it on to consumers.
Escalating producer inflation has raised doubts among market experts about whether the Federal Reserve (Fed) will reduce interest rates in September.
“This report is a strong validation of the Fed’s wait-and-see stance on policy changes," analysts at High Frequency Economics said.
According to the CME FedWatch Tool, traders still see it likely that the Fed will cut interest rates in September. Market expectations for Fed interest rate cuts were intensified by cooling labor market conditions and the absence of signs supporting the flow of tariff effects into prices in the Consumer Price Index (CPI) report of July, released on Tuesday.
Market experts believe that consumer prices rose moderately since the tariff announcement because importers shielded consumers from higher prices by stocking higher inventory before the announcement of reciprocal duties on the so-called “Liberation Day”.
“We anticipate broader signs of tariff-driven inflation in the data over time as inventories roll over and firms adjust pricing under margin pressure,” analysts at Oxford Economics said, CBS News reported.
Daily digest market movers: Pound Sterling trades stable as focus shifts to UK CPI data
- The Pound Sterling trades broadly stable, in a calm day, with investors awaiting fresh cues about the likely monetary policy action by the Bank of England (BoE) in the remainder of the year. Financial market participants expect the BoE to hold interest rates at their current levels as price pressures in the United Kingdom (UK) have remained elevated. Additionally, better-than-projected Q2 Gross Domestic Product (GDP) data has come in as relief for policymakers.
- On Thursday, the Office for National Statistics (ONS) reported that the economy rose at a faster pace of 0.3% in the second quarter of the year, stronger than expectations of 0.1%, but slower than the prior release of 0.7%.
- In the near term, economists believe that global trade risks, weak labor demand, and a likely increase in taxes by UK Chancellor of the Exchequer Rachel Reeves in the Autumn Budget could be major drags on economic growth. "We don’t expect growth to pick up much from here as continued consumer caution, weaker global demand, and tax increases all continue to drag," economists at accountants RSM UK said, Reuters reported. The probability of Reeves raising taxes is high as the Chancellor needs to offset the impact of higher welfare spending, announced in early July, to meet her fiscal target.
- Going forward, investors will focus on the UK Consumer Price Index (CPI) data for July, which is scheduled to be released on Wednesday.
- In Friday’s session, investors will focus on the US Retail Sales data for July, which will be published at 12:30 GMT. Economists expect Retail Sales to have grown by 0.5% on a month, slower than the prior reading of 0.6%.
- On the global front, financial market participants will pay close attention to the meeting between US President Donald Trump and Russian leader Vladimir Putin in Alaska on Friday. US President Trump has called Russian leader Putin to discuss ending the war in Ukraine. According to a report from Reuters, Trump said on Thursday that he believes Putin is ready to end the conflict, but peace would likely require at least a second meeting involving Ukraine’s leader.
Technical Analysis: Pound Sterling’s rally halts near 1.3600
The Pound Sterling trades near 1.3540, down from the two-month high of 1.3600 posted on Thursday. The near-term trend of the GBP/USD pair remains bullish as it holds the 20-day Exponential Moving Average (EMA), which trades around 1.3450.
The 14-day Relative Strength Index (RSI) strives to break above 60.00. A fresh bullish momentum would emerge if the RSI breaks above that level.
Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.
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, also known as ‘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.