Pound Sterling remains on tenterhooks amid increasing BoE interest rate cut bets
- The Pound Sterling trades mixed against its currency peers as its outlook remains uncertain amid BoE dovish bets.
- BoE’s Taylor said he expects inflation to return to the 2% target in the near term.
- Investors widely expect the Fed to cut interest rates on Wednesday.
The Pound Sterling (GBP) trades mixed against its major peers on Tuesday, facing pressure as traders remain increasingly confident that the Bank of England (BoE) will cut interest rates by 25 basis points (bps) to 3.75% at its monetary policy meeting next week.
BoE dovish expectations have been prompted by weakening United Kingdom (UK) labor market conditions and a slowdown in inflation. The latest survey by accountants KPMG and the Recruitment and Employment Confederation showed on Monday that permanent job placements remained weak last month in the run-up to Chancellor of the Exchequer Rachel Reeves’ budget on November 26 amid fears of possible tax increases, Reuters reported.
On Monday, BoE external member Alan Taylor stated that inflation could return to the 2% target in the near term as both wage and services inflation have slowed down recently. “We’ve got our foot on the brake a little bit still, but I see us achieving the inflation target, as we should, in the near term,” Taylor said.
For more cues on the UK interest rate outlook, investors will focus on BoE Governor Andrew Bailey’s speech, which is scheduled for Wednesday. This week, investors will also focus on the Gross Domestic Product (GDP) data for October, which will be released on Friday.
Daily digest market movers: Pound Sterling remains sideways against US Dollar
- The Pound Sterling continues to trade in a tight range above 1.3300 against the US Dollar (USD) during the European session on Tuesday. The GBP/USD pair trades sideways as investors await the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat inside Monday’s trading range around 99.00.
- The Fed is almost certain to cut interest rates by 25 basis points (bps) to 3.50%-3.75% amid a slowdown in the United States (US) labour demand. Assuming that the Fed will loosen monetary conditions, the major driver for the US Dollar will be the Fed’s monetary policy statement, the dot plot, and Chairman Jerome Powell’s press conference to get cues on the interest rate outlook.
- It is likely that the Fed will perform a delicate balancing act as inflationary pressures have remained well above the 2% target, and the job market has slowed down, partly due to the growing acceptance of Artificial Intelligence (AI) across industries.
- Investors will also focus on the Fed’s economic projections report to know where policymakers collectively see the Federal Fund Rates heading in the medium and longer term. The report will also include fresh estimates for inflation, growth, and the jobless rate.
- In Tuesday’s session, market participants will focus on the JOLTS Job Openings data for October, which will be published at 15:00 GMT. The data is expected to show that US employers posted 7.2 million fresh jobs in that period.
Technical Analysis: Pound Sterling holds key 20-day EMA
The Pound Sterling wobbles in a tight range above 1.3300 against the US Dollar on Tuesday. The pair holds above a rising 20-day Exponential Moving Average (EMA) at 1.3244, maintaining a positive near-term bias. The 20-day EMA has sloped higher in recent sessions, and dips remain shallow.
The 14-day Relative Strength Index (RSI) at around 61 reflects bullish momentum, hints at an uptrend in the near term as the oscillator is far from overbought levels.
Momentum remains supportive while price stays above the rising 20-day EMA. A daily close above the 50% Fibonacci retracement at 1.3402 would reinforce the bullish tone and open room towards the October 17 high of 1.3471. Conversely, failure to breach that barrier would keep the pair consolidating, with pullbacks leaning toward the 38.2% Fibonacci area around 1.3305.
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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