- Pound Sterling vs. US dollar surged after US CPI data.
- US headline inflation data came in at a slower-than-expected 4.9% year-on-year pace.
- The data gives GBP/USD’s broader long-term uptrend momentum to extend.
Pound Sterling (GBP) strengthened sharply against the US dollar (USD) after a year. release of us Consumer Price Index (CPI) data for April on Wednesday. At the time of writing, it rose to new annual highs at 1.2670s.
The spike after the release is fueling the bullish long-term technical uptrend and favoring long holders over shorts.
Movements in the GBP/USD market
- CPI inflation in the US fell to 4.9% year-on-year in April, missing expectations of 5.0%. This reflects easing inflationary pressures and counterintuitively weakens the US dollar (strengthening GBP/USD) as the Federal Reserve (Fed) keeps interest rates unchanged.
- The pound is strengthening against the US dollar due to a widening monetary policy divergence as interest rates are still expected to rise substantially higher in the UK and currencies that have higher interest rates will benefit from more demand.
- Aside from the headline year-over-year number, the CPI release came in as expected: April rose 0.4% month-on-month and Core CPI rose 0.4% month-on-month and 5.5% year-on-year.
- The British pound will be affected by the outcome of the Bank of England (BoE) meeting on Thursday. A 25 basis point interest rate hike is now expected with almost 100% certainty. Less certain is the bank’s future leadership, BoE Chairman Andrew Bailey’s comments at a press conference and the split of members’ votes.
- Distribution vote at the last BoE meeting, the ratio was 7-2, with seven policymakers voting for a 25 basis point rate hike and two for no change. If the distribution changes either way, it will impact the GBP with a fall in the “no change” camp, leading to a rise in GBP/USD and vice versa.
- US Treasury yields have risen for four straight days and provided some support to the US dollar, but yields are pulling back slightly on Tuesday, which could be a slight headwind for the USD.
GBP/USD Technical Analysis: A new part of the uptrend is developing
GBP/USD is generally extending its established uptrend, making successively higher highs and higher lows, and this is likely to continue to favor long sterling positions over short ones.
Japanese shooting star candlestick the GBP/USD reversal pattern that formed on Monday at new year-to-date (YTD) highs failed to gain confirmation. Tuesday’s bullish close shows a lack of bearish follow-through and significantly reduces the validity of the reversal. The post-CPI rally has now almost regained YTD highs, further invalidating the pattern.
Since the overall trend is bullish, the exchange rate is likely to continue to strengthen. The May 2022 highs at 1.2665 provide the first level of resistance, but once broken open the way to the 100-week simple moving average (SMA) at 1.2713 and finally the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1 ,2758. All provide potential upside targets for the pair. Each level will have to be decisively broken through to open the door to the next.
Decisive bearish breakouts are characterized by long daily candles that break the relevant resistance levels and close near their highs or lows of the day (depending on whether the breakout is bullish or bearish). Alternatively, three consecutive candles that break the level can also be decisive. Such badges confirm that the breakout is not a “false breakout” or a bull/bear trap.
It would require a decisive break below the May 2 lows of 1.2435 to challenge the dominance of the uptrend and suggest the possibility of a bearish reversal.
The Relative Strength Index (RSI) is in the mid-60s at the time of writing, after peaking in the upper 60s on May 5. This suggests that a slight bearish divergence may be developing. If the RSI remains below 68 at Wednesday’s close, it will confirm a bearish divergence and indicate some underlying weakness. However, this alone would not be sufficient to conclude that there has been a reversal.
Frequently asked questions about the pound sterling
What is a 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 foreign exchange (FX) unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, as of 2022. data.
Its key trading pairs are GBP/USD aka ‘Cable’ which represent 11% of FX, GBP/JPY, or The ‘Dragon’ as traders know it (3%) and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
What impact do Bank of England decisions have on the pound sterling?
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary objective of “price stability” – a stable rate of inflation around 2%. Its primary tool to achieve this goal is the adjustment of interest rates.
When inflation is too high, the BoE will try to keep it in check by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for the GBP as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation drops too low, it is a sign of slowing economic growth. In this scenario, the BoE will consider cutting interest rates to make credit cheaper so businesses borrow more to invest in growth-creating projects.
How does economic data affect the value of the pound?
The data released assesses the health of the economy and can affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMI and employment can influence the direction of the GBP.
A strong economy is good for Sterling. Not only will it attract more foreign investment, but it may encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, if the economic data is weak, the pound sterling is likely to fall.
How does the balance of trade affect the pound?
Another important data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns on exports and what it spends on imports over a given period.
If a country produces a highly sought-after export, its currency will benefit purely from the extraordinary demand created by foreign buyers looking to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa a negative balance.
