Pound Sterling gains sharply against US Dollar on slower US inflation growth
- The Pound Sterling gains against the US Dollar after the release of the UK employment and the US inflation data.
- The US inflation cooled down in April, the headline CPI decelerated to 2.3%.
- Soft UK labor market data paves the way for more BoE interest-rate cuts.
The Pound Sterling (GBP) jumps to near 1.3250 against the US Dollar (USD) during North American trading hours on Tuesday. The on Tuesday. However, the outlook of the pair has turned bearish after breaking down from a Head and Shoulder (H&S) formation on the four-hour timeframe. A breakdown of the H&S chart pattern leads to a bearish reversal, and its formation near a critical resistance level increases its credibility.
The Cable slides near the 200-period Exponential Moving Average (EMA), which is around 1.3190, suggesting a bearish trend.
The 14-period Relative Strength Index (RSI) rebounds above 40.00 after sliding to near 33.00, indicating that the downside momentum has been defused. However, the bearish bias still prevails.
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.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.