GBP/USD Continues Upward Momentum Ahead of Critical US Inflation Data

• GBP/USD extended gains on Monday, climbing another 0.35%
• Market sentiment remains elevated as investors anticipate Fed rate cuts
• Upcoming US inflation data could challenge investor sentiment before the Fed's next rate decision

GBP/USD rose further on Monday, extending another 0.35% to recapture territory north of 1.3550. Market sentiment continues to favor interest rate cuts at the Federal Reserve's (Fed) next meeting on September 17, primarily driven by rapidly declining employment figures in the United States (US). However, the upcoming US Consumer Price Index (CPI) inflation data due this week could significantly disrupt current interest rate expectations.

GBP/USD is now challenging technical resistance just below the 1.3600 handle. Technical oscillators coupled with ongoing support from the 50-day Exponential Moving Average (EMA) indicate that bullish momentum may have room to extend. Historical data suggests that when similar technical patterns form during periods of changing inflation expectations, volatility tends to increase in currency pairs. However, recent price action has struggled to breach the 1.3600 level decisively, potentially setting up for a fresh swing low if the near-term technical ceiling holds.

US Inflation Data Remains Key Risk for Rate Cut Expectations

A general lack of United Kingdom (UK) data this week leaves the US economic calendar in the driver's seat. French Prime Minister Francois Bayou lost a confidence vote within the French Parliament this week; while French politics will have minimal direct impact on the Pound Sterling (GBP), the broader political uncertainty affecting global markets could potentially trigger elevated risk aversion suddenly.

US Producer Price Index (PPI) inflation data is scheduled for release on Tuesday, but Thursday's CPI inflation update will be the main focus this week. Market participants expect a slight easing in core PPI to 3.5% year-over-year from 3.7%, while traders anticipate August's headline CPI print will rise moderately to 2.9% from 2.7%. Research indicates that cryptocurrency markets often experience heightened volatility during major inflation data releases, as inflation rates can influence cryptocurrency price movements through their impact on monetary policy expectations.

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) globally, accounting for 12% of all transactions, averaging $630 billion daily 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 traders call it (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 the Pound Sterling?

The most significant factor influencing the Pound Sterling's value is monetary policy set by the Bank of England. The BoE bases decisions on achieving its primary goal of "price stability" – maintaining a steady inflation rate around 2%. Its main tool is interest rate adjustment. When inflation runs too high, the BoE typically raises interest rates, making credit more expensive for individuals and businesses. This generally strengthens GBP, as higher interest rates attract global investors seeking better returns. When inflation falls below target levels, it often signals slowing economic growth. In such scenarios, the BoE may lower interest rates to reduce credit costs, encouraging businesses to borrow and invest in growth-generating activities.

How does economic data influence the value of the Pound?

Economic data releases measure the health of the economy and can impact the Pound Sterling's value. Indicators including GDP, Manufacturing and Services PMIs, and employment figures can all influence GBP's direction. A robust economy benefits Sterling. It attracts more foreign investment and may encourage the BoE to increase interest rates, directly strengthening GBP. Conversely, weak economic data typically causes the Pound Sterling to decline.

How does the Trade Balance impact the Pound?

The Trade Balance is another important indicator for the Pound Sterling. This metric measures the difference between what a country earns from exports versus what it spends on imports over a specific period. If a country produces highly sought-after exports, its currency benefits from increased demand from foreign buyers seeking these goods. Therefore, a positive Trade Balance tends to strengthen a currency, while a negative balance typically weakens it.