Pound Sterling partially recovers after dovish BoE hold triggers losses
- The Pound Sterling bounces back against its major currency peers, recovering some of the previous day’s losses.
- A higher-than-expected number of BoE members supporting an interest rate cut on Thursday weighed on British currency.
- The US Dollar retraces as soft US labor market data supports dovish Fed bets.
The Pound Sterling (GBP) regains ground against its major currency peers on Friday after a sharp fall the previous day, which was driven by the Bank of England’s (BoE) signal that there is a high chance of an interest-rate cut in the near term.
In the monetary policy announcement on Thursday, the BoE unanimously decided to leave interest rates unchanged at 3.75%, with a 5-4 vote split. The BoE was widely expected to maintain the status quo, but the number of Monetary Policy Committee (MPC) members supporting keeping rates unchanged was lower than the seven expected by markets.
Regarding the monetary policy outlook, the BoE reiterated that the policy will remain on a “gradual downward path”, while expressing confidence that inflationary pressures will return to the 2% target “ahead of the schedule expected in November”. Governor Andrew Bailey refrained from setting a timeframe for the next interest-rate cut and declined to endorse 3.25% as a terminal rate, a level that neither restricts nor stimulates economic growth.
Still, markets quickly priced in a higher likelihood of a near-term cut. The Pound Sterling lost 0.8% on the day against the US Dollar (USD), with the GBP/USD pair touching a two-week low.
In Friday’s session, investors will pay close attention to BoE Chief Economist Huw Pill’s comments in a National MPC Agency briefing scheduled at 12:00 GMT for further details about the BoE's interest-rate outlook. Pill was one of five MPC members who voted to leave interest rates unchanged on Thursday.
Daily Digest Market Movers: Pound Sterling rises against US Dollar, US NFP in spotlight
- The Pound Sterling trades 0.3% higher to near 1.3570 against the US Dollar (USD) during the European trading session on Friday. The GBP/USD pair recovers after posting a fresh weekly low near 1.3500.
- A slight corrective move in the US Dollar after a week-long rally has also supported the pair. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is down 0.15% to near 97.80.
- The US Dollar has come under pressure as traders have raised bets supporting an interest rate cut by the Federal Reserve (Fed) at its Marchmonetary policy meeting. According to the CME FedWatch tool, the possibility of the Fed reducing interest rates next month by 25 basis points (bps) to 3.25%-3.50% has advanced to 22.7% from the 9.4% seen on Monday.
- Dovish Fed prospects have increased after the latest batch of United States (US) job market-related data showed continued weakness in the labor demand. The US JOLTS Job Openings report for December showed on Thursday that employers posted lower job vacancies – at 6.542 million against 6.928 million in November.
- ADP reported on Wednesday that the private sector created 22K jobs in January, less than the 37K added in December.
- For more cues on the current state of the US labor market, investors will focus on the Nonfarm Payrolls (NFP) data for January, which will be released on Wednesday.
Technical Analysis: GBP/USD aims to return above 20-day EMA
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GBP/USD gains to near 1.3568 as of writing. The 20-day Exponential Moving Average (EMA) has softened to 1.3591 after a steady ascent, with price holding just beneath it and dampening immediate upside traction.
The 14-day Relative Strength Index (RSI) at 50 (neutral) confirms waning momentum from prior overbought readings.
The flattening 20-day EMA signals consolidation in the near term, though its elevated level still frames the upward trend bias. A decisive daily close back above 1.3591 could extend gains toward the February 4 high of 1.3733, while repeated rejection would keep the pair range-bound.
(The technical analysis of this story was written with the help of an AI tool.)
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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