The Pound Sterling (GBP) gains further to near 1.3350 against the US Dollar (USD) in Wednesday’s North American session. The GBP/USD pair extends Tuesday’s recovery move as the US Dollar retraces further after the release of the softer-than-expected United States (US) Consumer Price Index (CPI) data for April on Tuesday.
US headline inflation fell to 2.3% year-on-year, the lowest level seen since February 2021. The core CPI – which excludes volatile food and energy prices – grew steadily by 2.8%, as expected. On month, both headline and core CPI grew at a slower pace of 0.2%.
Technically, signs of cooling inflationary pressures should lead traders to support bets of an interest-rate cut by the Federal Reserve (Fed). However, market expectations for the Fed to leave interest rates steady in the July meeting have not diverged even an inch from the levels seen on Monday, a day prior to the release of US inflation data.
According to the CME FedWatch tool, the probability for the Fed to keep interest rates in the current range of 4.25%-4.50% in July remained steady at 61.4%. However, it is up significantly from 29.8% seen last week after the US and China announced a substantial reduction in tariffs.
Investors have taken the agreement with China as a favorable event for the US economic outlook, forcing them to delay expectations for interest rate cuts and offsetting the effects of declining inflation. Meanwhile, US President Donald Trump continues to endorse the need for rate cuts, strengthening his argument in the wake of falling prices of significant goods.
“No Inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are DOWN!!! THE FED must lower the RATE, like Europe and China have done,” Trump said on Truth Social. Trump criticized Fed Chair Jerome Powell for not lowering interest rates: “What is wrong with Too Late Powell? Not fair to America, which is ready to blossom? Just let it all happen, it will be a beautiful thing!” Trump added.
The Pound Sterling gains to near 1.3350 against the US Dollar on Wednesday. The GBP/USD pair returns above the 20-day Exponential Moving Average (EMA), which trades around 1.3255, suggesting that the trend has turned bullish again.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range. A fresh bullish momentum would appear if the RSI breaks above 60.00.
On the upside, the three-year high of 1.3445 will be a key hurdle for the pair. Looking down, the psychological level of 1.3000 will act as a major support area.
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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EUR/USD extends its correction from daily peaks near 1.1270 and now approaches the key support at 1.1200 on the back of further rebound in the US Dollar. The pair, however, maintains its daily gains ahead of Thursday’s speech by Chief Powell and the release of key US data.
GBP/USD now breaks below the 1.3300 support, turning negative for the day, amid quite a decent bounce in the Greenback on Wednesday. Cable’s initial gains found support on the hawkish remarks by BoE officials, all ahead of a busy UK calendar on Thursday.
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Markets roared back to life as the US and China hit pause on their escalating trade war, with both sides emphasizing mutual respect and dignity. But it wasn’t the fine print that moved markets—it was the mood shift. Investors rushed back into risk assets, betting that the worst might be behind us.
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