• Wed. May 22nd, 2024

The Pound Falls Against the Dollar as the US Core PCE Inflation Rate Rises

Leon Kramer

ByLeon Kramer

Apr 27, 2024
The Pound Falls Against the Dollar as the US Core PCE Inflation Rate Rises

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  • The Pound Sterling faces downward pressure as the US Dollar bounces back in response to strong US core PCE Price Index data.
  • US annual inflation has accelerated to 2.7%, surpassing the consensus of 2.6%.
  • The Pound Sterling is facing downward pressure due to solid speculation of rate cuts by the Bank of England.

In Friday’s early American session, the US dollar (USD) put downward pressure on the pound sterling (GBP) near the 1.2500 level. The GBP/USD pair declined due to intense anticipation that the Bank of England (BoE) will commence a decrease in interest rates starting from the June meeting. 

Members of the Bank of England’s policy committee anticipate a significant decline in inflation in the coming months. However, they have yet to specify a precise timeline for potential interest rate reductions.

During the press conference following the recent monetary policy meeting, BoE Governor Andrew Bailey expressed that the market’s anticipation of two or three rate reductions this year is not unfounded. 

Meanwhile, the economic prospects of the United Kingdom have brightened, despite the Bank of England (BoE) keeping interest rates elevated. The initial PMI report from S&P Global/CIPS for April unveiled on Tuesday, indicated that the services sector continues to exhibit strength, propelling overall activity upward despite a sluggish Manufacturing PMI. The data also showed that there is a robust influx of new businesses in the service sector. 

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Increased demand for services typically leads to a rise in job opportunities and higher wages within the industry, which in turn contribute to inflationary pressures. This may impede progress toward achieving the targeted inflation rate of 2%.

In addition, policymakers at the Bank of England have expressed ongoing concerns regarding the elevated levels of inflation in the service sector. At present, the inflation rate for services in the UK stands at 6%, surpassing the level necessary to reduce inflation to the desired target of 2% effectively.

The Pound Sterling Is Falling While the Dollar Is Recovering

  • The Pound Sterling is finding it challenging to maintain its momentum near a ten-day peak, hovering around the significant level of 1.2500 against the US Dollar. The US Dollar bounces back as the US core PCE data for March continues to exceed expectations. 
  • On a yearly basis, the core inflation rate increased slightly to 2.7% from the projected 2.6%, although it is still lower than the previous figure of 2.6%. Every month, the inflation data consistently increased by 0.3%.
  • The unyielding inflation figures may enable the Fed to uphold a more aggressive stance. Fed policymakers have consistently emphasized that interest-rate reductions are suitable only when they are confident that inflation will reliably reach the desired 2% goal. 
  • Following the release of the core inflation figures, investors will turn their attention to the Federal Reserve’s upcoming monetary policy announcement on Wednesday. It is widely expected that the Federal Reserve will maintain interest rates within the range of 5.25% to 5.50%. Investors will pay close attention to the Federal Reserve’s indications regarding interest rates.
  • On Thursday, the US Dollar faced downward pressure as the initial United States Gross Domestic Product (GDP) expansion in the first quarter fell short of expectations. 
  • According to the US Bureau of Economic Analysis (BEA), the economy grew at a less rapid rate of 1.6% in the first quarter, which was lower than the anticipated 2.5% and the previous reading of 3.4%. In spite of the data discrepancy, traders are confident in their predictions that the Federal Reserve will begin lowering interest rates either in September or in the fourth quarter, given the substantial increase in the GDP Price Index. The inflation rate increased to 3.1% from the previous reading of 1.7%.

The Pound Sterling Is Encountering Opposition Close to 1.2500

The British Pound is trading close to its highest level on Thursday, around 1.2500, against the US Dollar. The GBP/USD pair is facing difficulty furthering its gains over the 20-day EMA, currently hovering around 1.2510.

The 14-period Relative Strength Index (RSI) bounces back above 40.00, indicating that a downward trend may have temporarily ended. Nevertheless, the overall pessimistic sentiment remains unchanged in the long run.

If the pair manages to break through the significant barrier at 1.2500, it is likely to continue its upward momentum towards the 200-day EMA, which is currently positioned around 1.2550. Alternatively, if GBP/USD drops below Wednesday’s low of approximately 1.2430, it could potentially reach a five-month low of around 1.2300.

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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