Pound Sterling capitalizes on soft US Dollar and uncertainty over BoE rate cuts
- The Pound Sterling moves higher as the US Dollar drops even though Fed rate-cut bets ease.
- Improved US economic outlook has weighed on Fed rate-cut prospects for September.
- UK Retail Sales and preliminary PMI weaken due to BoE’s restrictive interest rate policy.
The Pound Sterling (GBP) rises to near 1.2750 against the US Dollar (USD) in Monday’s London trading session. The GBP/USD pair remains firm as bets supporting the Bank of England (BoE) reducing interest rates from the June meeting have diminished due to a slower-than-expected decline in the United Kingdom’s (UK) consumer inflation for April.
Economists forecasted that the UK headline inflation would fall to 2.1% year-over-year in April but slowed to 2.3% from the previous reading of 3.2%. Also, a nominal decline in the UK service inflation deepens fears of inflation remaining persistent for a longer period. The UK service inflation slowed slightly to 5.9% from the prior reading of 6.0%. UK’s sticky service inflation has remained a major barrier to price pressures returning to the objective rate of 2%.
However, other economic indicators, such as Retail Sales and the preliminary Purchasing Managers’ Index (PMI) report for May, suggest that the UK economy struggles to absorb the consequences of higher BoE interest rates. Retail Sales declined significantly as rainfall reduced consumer footfall at retail stores. May’s S&P Global/CIPS Composite PMI was dragged down due to a sharp decline in demand in the service sector.
Daily digest market movers: Pound Sterling exhibits strength against the US Dollar
- The Pound Sterling remains firm against the US Dollar in a thin-volume trading session due to holidays in the United Kingdom (UK) and the United States (US) markets on account of the Spring Bank Holiday and Memorial Day, respectively. Though trading activity is expected to remain quiet, any surprise move due to the occurrence of a global event could spur a sharp directional move as fewer market participants would struggle to absorb unexpected orders.
- The near-term outlook of the GBP/USD pair remains firm as the US Dollar is under pressure despite traders paring bets supporting interest rate cuts by the Federal Reserve (Fed) from their current levels in the September meeting. The CME FedWatch tool shows that the probability for rate cuts in September has reduced to 49% from 63% recorded a week ago, suggesting that investors’ confidence in Fed rate cuts has been pushed to the November meeting.
- Market speculation about the Fed lowering interest rates from September has eased as policymakers have been maintaining hawkish guidance on interest rates and an improvement in the US economic outlook. Fed officials want to see inflation declining for months to be sure that it will return to the desired rate of 2%. Officials are less convinced that the slowdown in inflation in April will last long.
- Given the strength of the US labor market, Fed officials believe that they can maintain the current interest rate framework for a longer period. Meanwhile, the surprisingly upbeat preliminary US PMI report for May has also exhibited a firm picture of economic prospects.
- This week, market speculation for Fed rate cuts will be significantly influenced by the core Personal Consumption Expenditure price index (PCE) data for April, which will be published on Friday. A slowdown in April’s Consumer Price Index (CPI) after a hot first quarter suggests that core PCE inflation figures could also remain soft from prior readings.
Technical Analysis: Pound Sterling seems well-established above 61.8% Fibo retracement
Pound Sterling trades close to Friday’s high around 1.2750. The GBP/USD pair is likely to extend upside above the weekly high near 1.2760 as the outlook is bullish. The appeal for the Cable remains high as it has established a firm footing above the 61.8% Fibonacci retracement (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300) at 1.2667.
The Cable is expected to remain in the bullish trajectory as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend.
The 14-period Relative Strength Index (RSI) has shifted into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.