The British Pound (GBP) has succeeded in maintaining a position above $1.27 against the United States Dollar (USD) on Wednesday, August 10, 2023. This level was regained after previous losses, and the market now expects an increase in rates, although not a substantial one. In the lead-up to Thursday's inflation figures from the U.S., the Pound's performance has been largely dictated by developments in the EUR/USD market. The absence of significant domestic drivers has left the Pound essentially flat against the USD as the European session comes to a close on Wednesday.
This month has already seen the Bank of England's interest rate decision. Thus, there is little to anticipate from the UK's economic calendar until the release of expected lackluster growth figures on Friday and the upcoming comprehensive data next week. This includes everything from employment data, and retail sales, to inflation numbers. This has set the stage for the Pound's performance, which faces a higher and more prolonged inflationary pressure compared to other developed economies.
Since mid-July, the GBP/USD pair has experienced a sharp decline. This is due to the United Kingdom's higher and persistent inflation, leading to a steeper cost of living crisis. However, the market shows signs that prices might be stabilizing. Even though the market believes that the UK's local interest rates may rise further, there is growing consensus that the worst might be over, and borrowing costs may begin to decrease by the end of 2024.
The U.S. side of the GBPUSD pair is also contemplating higher interest rates, albeit not significantly so. Philadelphia Federal Reserve President Patrick Harker hinted that the Federal Reserve may hold interest rates unless there's an unexpected change in economic data. Meanwhile, China's deflation, marked by a 0.3% decline in consumer prices in July, boosted investor risk appetite in anticipation of economic stimulus from Beijing. The next critical milestone for the GBP/USD pair will likely be the U.S. Consumer Price Index release on Thursday, with headline inflation expected to increase to 3.3%.
In technical terms, the Sterling bulls' failed attempt to break into a trading band between 1.29917 and 1.33127 only resulted in a fifteen-month high in mid-July before prices declined. While the psychological 1.27 handle was regained, resistance at 1.2825 will probably prove challenging. Despite recent weakness, the Pound is still well above its first Fibonacci retracement since last September to July's high. Sentiment towards the GBP/USD pair is currently mixed, with 55% of traders bullish and 45% bearish.
The ongoing developments in the GBP/USD pair present intriguing insights for Forex traders. As the British Pound wrestles with domestic inflation and global economic conditions, its relationship with the U.S. Dollar continues to fluctuate, reflecting broader trends in the Forex market. The impending U.S. CPI data will likely cause significant ripples in the Forex trading landscape, potentially altering the course of both GBP and USD. Additionally, the intertwining of GBP with EUR/USD signifies the interconnected nature of currency pairs within the Forex arena. Forex traders need to keep a close eye on these dynamics as they strategize their positions in the Forex market, recognizing that shifts in one currency pair often resonate across the entire Forex ecosystem.