The Pound Sterling sees pressure near 1.2500 as the US Dollar recovers sharply.
BoE Governor Andrew Bailey expects a sharp drop in April’s inflation.
US GDP grew at a slower pace of 1.6% in the first quarter this year.
The Pound Sterling (GBP) faces pressure near the psychological resistance of 1.2500 against the US Dollar (USD) in Thursday’s early American session. The GBP/USD pair drops as the US Dollar rebounds sharply after the United States Q1 Gross Domestic Product (GDP) report showed that inflation accelerated sharply. The preliminary GDP Price Index rose sharply by 3.1% from the prior reading of 1.7%. This has prompted expectations that the Federal Reserve (Fed) will keep interest rates restrictive for a longer period.
Meanwhile, the US economy grew at a slower pace of 1.6% from expectations of 2.5% and the former reading of 3.4%. This has deepened concerns over the US economic outlook.
On the United Kingdom front, Investors’ confidence in the UK economy’s outlook improved after the preliminary PMI report from S&P Global/CIPS for April showed that new business volumes increased across the private sector as a whole. The agency also reported that the rate of growth of overall activity was the strongest since May 2023. However, the expansion was centred on the service sector, as manufacturers saw a moderate downturn in order books.
Despite the recent upturn, downside risks to the Pound Sterling remain high as investors expect the Bank of England (BoE) will pivot to interest-rate cuts before the Federal Reserve (Fed) does so. Last week, BoE Governor Andrew Bailey said: “I expect next month’s inflation number will show quite a strong drop.” Bailey added that Oil prices haven’t leaped as much as expected and that the effect of the Middle-East conflict “is less than feared.”
Daily digest market movers: Pound Sterling finds offers after refreshing 10-day high
The Pound Sterling faces selling pressure while attempting to cross above the psychological resistance of 1.2500 against the US Dollar. A sharp recovery in the US Dollar has built pressure on the GBP/USD pair. The US Dollar moves higher despite weak GDP growth and a poor preliminary US PMI report that have raised doubts over the strong economic outlook of the economy. Meanwhile, similar data for the UK presented a recovery in overall private-sector activity fueled by the Services sector.
The US PMI report showed on Tuesday that surprisingly both the Manufacturing and Services PMI were down from the prior readings. The Manufacturing PMI even fell below the 50.0 threshold, signalling a contraction. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April. Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook.
Despite uncertainty over the US economic outlook, speculation that the Federal Reserve will begin lowering interest rates after the September meeting remains firm. Going forward, investors will focus on the core Personal Consumption Expenditure Price Index (PCE) data for March.
For more clarity over Fed’s rate-cut timing, investors will wait for the core PCE inflation data for March, to be published on Friday. The underlying inflation data is estimated to have grown steadily by 0.3% on month, with annual figures softening to 2.6% from the 2.8% recorded in February.
Technical Analysis: Pound Sterling struggles around 1.2500
The Pound Sterling extends its recovery to the crucial resistance of 1.2500 against the US Dollar. The GBP/USD pair moves sharply higher after finding strong buying interest near a five-month low of around 1.2300. The near-term outlook of the Cable is still bearish as the 20-day Exponential Moving Average (EMA) at 1.2509 is declining.
The 14-period Relative Strength Index (RSI) rebounds above 40.00, suggesting that a bearish momentum has concluded for now. However, the bearish bias remains intact.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
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