Pound Sterling weakens against US Dollar amid political jolts in Japan and France
- The Pound Sterling falls sharply to near 1.3440 against the US Dollar as the Greenback’s safe-haven demand has increased.
- All eyes are on the speeches of several Fed officials as the bank is expected to cut interest rates two more times this year.
- Investors await BoE Pill’s speech due Wednesday for fresh cues on the monetary policy outlook.
The Pound Sterling (GBP) declines 0.3% to near 1.3440 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD pair slumps as the safe-haven demand of the US Dollar increases due to political jolts in Japan and France.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gains 0.25% to near 98.35.
Broadly, firm Federal Reserve (Fed) dovish bets and ongoing US government shutdown are expected to keep a lid on the US Dollar’s upside. Fed dovish bets have increased amid weakening labor market conditions, with consumer inflation expectations remaining anchored.
According to the CME FedWatch tool, traders see an 81.5% chance that the Fed will reduce borrowing rates in each of its two remaining monetary policy meetings this year.
For fresh cues on the central bank's outlook, investors await speeches from a slew of Fed officials: Atlanta Fed President Raphael Bostic, Fed Governors Michelle Bowman and Stephen Miran, and Minneapolis Fed President Neel Kashkari, all scheduled for this Tuesday during the North American session. Investors would like to know the current status of the US labour market due to the absence of key economic data releases amid the government shutdown.
Daily digest market movers: Pound Sterling underperforms on likely more BoE interest rate cuts this year
- The Pound Sterling underperforms its peers, except antipodeans, on Tuesday. The British currency faces selling pressure amid rising expectations that the Bank of England (BoE) could cut interest rates one more time in the remainder of the year.
- BoE dovish expectations have slightly increased amid growing United Kingdom (UK) labour market concerns. The latest BoE survey showed that businesses in the three months to September expected to keep employment steady over the next 12 months, the first time since January when they have been observed reluctant to increase staffing, Reuters reported.
- Slowing UK job demand is expected to allow BoE officials to turn dovish on interest rates in November’s monetary policy meeting. Until now, the central bank has retained a “gradual and careful” monetary easing approach.
- The BoE has refrained from reducing interest rates aggressively as price pressures have remained well above the 2% target for a long period. However, the BoE stated in September’s meeting that inflation would peak around 4% in the same month.
- For more cues on the UK’s interest rate outlook, investors will focus on the speech from BoE Chief Economist Huw Pill, which is scheduled on Wednesday. Pill was one of seven Monetary Policy Committee (MPC) members who voted to keep interest rates on hold at 4% in September.
Technical Analysis: Pound Sterling falls to near 1.3440
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The Pound Sterling slides to near 1.3440 against the US Dollar on Tuesday. The GBP/USD pair struggles to return above the 20-day Exponential Moving Average (EMA), which trades around 1.3475.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a sideways trend.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the September 17 high of 1.3726 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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