Pound Sterling trades with caution ahead of BoE’s monetary policy decision
- The Pound Sterling remains on the sidelines against its currency peers ahead of the BoE’s monetary policy announcement.
- Investors expect the BoE to hold interest rates steady at 4%.
- US ADP Employment Change and ISM Services PMI data for September beat estimates.
The Pound Sterling (GBP) trades cautiously against its major currency peers on Thursday ahead of the Bank of England’s (BoE) monetary policy announcement at 12:00 GMT. The central bank's interest rate decision is expected to be a cautious one at times when the United Kingdom (UK) Chancellor of the Exchequer, Rachel Reeves, is likely to announce tax hikes in the upcoming Autumn Budget later this month.
UK Chancellor Reeves is expected to break her self-imposed rules of not raising taxes on working people and avoid borrowings to fund day-to-day public spending to plug a £22bn shortfall in the government's finances.
Investors wait for the BoE to hold interest rates steady at 4%, with a 6-3 majority as inflationary pressures are significantly higher than the central bank’s 2% target. The latest UK Consumer Price Index (CPI) report showed that the headline inflation on year grew steadily by 3.8% in September, while the core CPI – which excludes volatile food and energy items – cooled down to 3.5% in the same period.
According to a report from Reuters, traders see one in a three chances that the BoE will cut interest rates by 25 basis points (bps) to 3.75% at this Thursday's meeting.
Apart from the BoE’s rate decision, investors will focus on commentaries regarding the current labor market status and when price pressures would start cooling down. In September’s policy meeting, the central bank stated that inflation will peak around 4% this month.
Daily digest market movers: Pound Sterling ticks higher against US Dollar
- The Pound Sterling trades marginally higher against the US Dollar (USD) around 1.1306 during the European trading session on Thursday. The GBP/USD pair ticks up as the US Dollar’s rally hits pause after the release of the United States (US) ADP Employment Change and ISM Services Purchasing Managers’ Index (PMI) data for October.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades subduedly around 100.05.
- On Wednesday, the US ADP Employment figures showed that the private sector added fresh 42K fresh jobs in October, higher than estimates of 25K. In September, employers laid off 29K workers. The US ISM Services PMI came in at 52.4, the highest level seen in eight months.
- Theoretically, upbeat US data releases strengthen the US Dollar’s appeal. Therefore, a slight correction in the Greenback appears to be short-lived,barring other things remaining constant.
- Meanwhile, receding Federal Reserve (Fed) dovish expectations for the December monetary policy meeting are expected to strengthen the US Dollar.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in December's meeting has eased to 62.5% from 94.4% seen before the monetary policy announcement on October 29.
- Last week, Fed Chairman Jerome Powell commented in the press conference following the monetary policy announcement that the December rate cut is “far from a foregone conclusion” as officials had “strongly different views” in the meeting, adding that the takeaway is “we haven't made a decision about December”.
Technical Analysis: Pound Sterling stays below 200-day EMA
The Pound Sterling edges higher to near 1.3055 against the US Dollar on Thursday. The GBP/USD pair holds its over six-month low around 1.3000 posted on Tuesday. The overall trend of the pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3263.
The 14-day Relative Strength Index (RSI) slumps below 30.00, indicating that the overall momentum is bearish.
Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 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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