Pound Sterling trades with caution ahead of flash UK-US PMI data
- The Pound Sterling demonstrates caution against its peers ahead of the preliminary UK-US PMI data for August.
- BoE officials might hesitate to cut interest rates in the remainder of the year.
- Investors await Fed Powell’s speech at the Jackson Hole Symposium.
The Pound Sterling (GBP) trades cautiously against its major peers on Thursday as investors await the preliminary United Kingdom (UK) S&P Global Purchasing Managers’ Index (PMI) data for August, which will be published at 08:30 GMT.
Economists expect the UK Composite PMI to have grown at a slightly faster pace to 51.6 as activities in the services sector are estimated to have remained steady. Meanwhile, the Manufacturing PMI is seen at 48.3, up from 48.0 in July, suggesting that the manufacturing sector business activity contracted again, but at a moderate pace.
Investors will also focus on the PMI data to gauge whether private firms are still hesitant to increase the labor force. Lately, labor market indicators signaled that business owners are reluctant to hire fresh workers to offset the increase in employers’ contributions to social security schemes.
Meanwhile, Bank of England (BoE) officials are expected to be reluctant to cut interest rates in the remainder of the year as the UK inflation is proving to be persistent. The Office for National Statistics (ONS) reported on Wednesday that price pressures grew at a faster-than-expected pace in July. The headline Consumer Price Index (CPI) came in at 3.8% on year, the highest level seen in almost 18 months. The core CPI – which excludes volatile items such as food, energy, alcohol and tobacco – also grew at an annual pace of 3.8%.
Earlier this month, the BoE reduced interest rates by 25 basis points (bps) to 4%, with a narrow majority, and guided a “gradual and careful” monetary easing approach.
Daily digest market movers: Pound Sterling declines against US Dollar for fourth straight trading day
- The Pound Sterling extends its losing streak for the fourth trading day against the US Dollar (USD) on Thursday. The GBP/USD pair slides to near 1.3440 as the US Dollar trades higher, with investors awaiting the Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium on Friday.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is rising close to the weekly high near 98.45.
- Market experts believe that gains in the US Dollar are driven by hopes that Fed Chair Powell will argue in favor of holding interest rates at their current levels. "Given the relatively high bar for Powell to meet, there’s a bit of risk being baked into the markets that he leans to the hawkish side and the proverbial rug gets pulled from beneath investors," analysts at Capital.com said, Reuters reported.
- The Federal Open Market Committee (FOMC) minutes of the July monetary policy meeting showed on Wednesday that a majority of members, including Jerome Powell, argued in favor of a restrictive monetary policy stance as they need time to have more clarity on the “magnitude and persistence of higher tariffs’ effects on inflation”.
- According to the CME FedWatch tool, there is an almost 81.6% chance that the Fed will cut interest rates by 25 bps to the 4.00%-4.25% range in the September meeting.
- Meanwhile, US President Donald Trump has attacked the Fed’s independence again by calling Fed Governor Lisa Cook to resign after citing allegations made by one of his political allies about mortgages Cook holds in Michigan and Georgia. In response, Cook has stated that she is “gathering accurate information to provide facts”, and “has no intention of being pressured to step down”.
- In Thursday’s session, investors will focus on the preliminary US S&P Global PMI report for August, which will be published at 13:45 GMT. Economists expect the Composite PMI to have expanded moderately.
Technical Analysis: Pound Sterling extends correction to near 20-day EMA
The Pound Sterling falls slightly against the US Dollar on Thursday. The GBP/USD pair corrects to near the 20-day Exponential Moving Average (EMA), which trades around 1.3460, suggesting that the near-term trend has become uncertain.
The 14-day Relative Strength Index (RSI) drops to near 50.00. indicating a lack of momentum.
Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.
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, also known as ‘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.
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