Pound Sterling falls due to US Dollar’s recovery, uncertainty ahead of BoE’s policy decision
- The Pound Sterling dips slightly below 1.2500 due to multiple headwinds.
- Investors expect UK interest rates to remain steady at 5.25% with less-hawkish BoE’s guidance on interest rates.
- Fed’s Kashkari supports keeping interest rates steady for the entire year.
The Pound Sterling (GBP) slips below the psychological support of 1.2500 against the US Dollar (USD) in Wednesday’s London session. The GBP/USD pair faces a sell-off due to multiple headwinds, such a sharp recovery in the US Dollar and uncertainty ahead of the Bank of England’s (BoE) interest rate decision, which will be announced on Thursday.
Interest rates in the United Kingdom are expected to remain steady at 5.25% for the sixth time in a row. However, the BoE could turn slightly dovish on the interest rate outlook as policymakers are confident that the headline inflation could have returned to the desired rate of 2% in April, according to comments from BoE Governor Andrew Bailey in the annual Spring Meeting hosted by the International Monetary Fund (IMF) last month.
Financial markets anticipate that the BoE will start reducing interest rates from the June meeting. Traders price in 53 basis points (bps) of easing this year, implying at least two quarter-point cuts, having previously fully priced only one rate cut after inflation data last month showed prices slowed by less than expected in March, Reuters reported. The expectations for the same strengthened after Andrew Bailey said in the last monetary policy meeting that speculation for two or three rate cuts this year is reasonable.
Daily digest market movers: Pound Sterling falls while US Dollar extends recovery
- The Pound Sterling extends its correction slightly below the psychological support of 1.2500 against the US Dollar. The appeal for risk-perceived assets weakens after hawkish guidance on United States interest rates by Minneapolis Federal Reserve (Fed) Bank President Neel Kashkari on Tuesday.
- Kashkari cited concerns over stalling progress in disinflation due to housing market strength and warned that interest rates need to remain where they are possibly for the entire year. For a rate cut, Kashkari emphasized that he wants to see multiple positive inflation readings, which could build confidence that inflation is on course to return to the desired rate of 2%. He added that weakness in the job market could also justify a rate cut.
- Kashkari’s hawkish interest rate outlook has improved the appeal for the US Dollar, with the US Dollar Index (DXY)—which tracks the Greenback’s value against six major currencies—extending its upside to 105.50. The USD Index recovers the majority of losses linked with weak US Nonfarm Payrolls (NFP) and ISM Services PMI data for April.
- The speculation that the Fed will reduce interest rates from their current levels in the September meeting remains firm. The CME FedWatch tool shows that traders see two rate cuts this year.
- This week, investors will focus majorly on speeches from Fed policymakers to predict the next move in the US Dollar due to the absence of top-tier US economic data. On Wednesday, Fed Vice Chair Philip Jefferson, President of the Federal Reserve Bank of Boston Susan Collins and Fed Governor Lisa Cook are lined up to provide interest rate guidance.
Technical Analysis: Pound Sterling drops below 1.2500
The Pound Sterling falls slightly below the psychological support of 1.2500. The GBP/USD pair is under pressure after facing strong resistance above the neckline of the Head and Shoulder (H&S) chart pattern formed on a daily timeframe. On April 12, the pair suffered an intense sell-off after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.
Investors tend to turn cautious about the near-term outlook as the Cable fails to sustain above the 20-day Exponential Moving Average (EMA), which trades at around 1.2520.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
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.