PoundSterlingLIVE - Pound Sterling was under pressure through the midweek session amidst the bout for dominance between the Dollar and Euro ahead of Thursday's U.S. inflation data release and it will only be next week when traders get something UK-centric to get their teeth stuck into.
With little on the UK calendar, the Pound is trading as a function of developments in the Euro-Dollar exchange rate, the world's dominant currency pair, which was seen making another attempt at reclaiming the 1.10 level.
"Technical analysis shows that EUR/USD is yo-yo-ing around the important pivot of 1.10, with the Euro and US dollar battling for supremacy. This is having a knock-on effect on GBP/EUR and GBP/USD, with the pound being pushed and pulled by its relative strength to those two dominant currencies rather than moving significantly of its own volition," says Joe Calnan at MoneyCorp.
The Pound to Dollar exchange rate slipped to 1.2735 Wednesday but price action over recent days suggests there is a decent amount of support to be found around here, with the pair unable to close below 1.27 since July 03.
The strengthening in EUR/USD meanwhile suggests the Euro is finding a stronger bid and this has pressured the Pound to Euro exchange rate right back to the round figure at 1.16, although we note the more significant levels of support for this pair are actually lower towards 1.1550 and therefore wouldn't be surprised to see further near-term weakness.
The FX market could see some fresh impetus on Thursday when the U.S. releases its latest inflation data which should provide a clearer steer as to whether the Federal Reserve will raise interest rates again in September.
"The US CPI report will be the main market driver," says Dominic Schnider, a strategist at UBS. "A soft CPI reading would weaken the US dollar, in our view."
An undershoot would maintain a trend of downside inflation surprises that would ease pressure on U.S. interest rates and this could underpin a rebound in the Pound-Dollar.
However, a topside surprise would be where the action lies as this could rejuvenate Fed hike bets and prompt a fresh leg higher in the Dollar, injecting a fresh dose of uncertainty into the Pound-Euro rate.
The recent trend is for a weakening in Pound Sterling against the Euro and this could ultimately extend should global equity markets come under pressure, a likely prospect if investors fret over higher interest rates.
"A frosty week in FX markets could heat up tomorrow with US CPI data for July. The lead-up to a big data release, such as inflation, often creates a risk-off-the-table attitude in global markets, and this week is certainly shaping up this way," says Calnan.
Beyond the near-term the Pound remains well supported by UK interest rate expectations and the Bank of England's message rates will stay higher for longer.
As such, weakness could prove relatively shallow on a multi-day basis.
"For GBP bulls, persistently high UK inflation is expected to keep the BoE hiking, with markets pricing 2-more 25bp hikes by March 2024, which should, at a minimum, keep the pound from falling precipitously as markets price a 40% chance for a further Fed hike," says Paul Spirgel, a market analyst at Reuters.
Next week brings the release of UK inflation and labour market data, two critical prints for the Bank of England which looks set to hike rates again in September but potentially pause after this.
A strong set of wage and inflation figures would boost the odds of a November rate hike and potentially offer the Pound the shot at reclaiming recently lost value.
An original version of this article can be viewed at Pound Sterling Live