Pound Sterling trades with caution at the start of BoE’s policy week
- The Pound Sterling remains under pressure against its peers amid uncertainty ahead of BoE’s monetary policy announcement.
- BoE dovish bets accelerate due to slowing UK job growth.
- The US Dollar demonstrates strength amid easing Fed dovish bets.
The Pound Sterling (GBP) trades cautiously against its peers at the start of the week. The British currency is expected to remain volatile amid uncertainty surrounding the Bank of England’s (BoE) interest rate policy, which will be announced on Thursday.
Traders see a one in three chance that the BoE will cut interest rates by 25 basis points (bps) to 3.75%, according to a Reuters report. BoE dovish expectations have accelerated lately due to slower-than-projected United Kingdom (UK) Consumer Price Index (CPI) growth seen in September and signs of moderating labor demand reflected by the employment data for the three months ending August.
In the September policy meeting, the BoE also stated that inflationary pressures would peak around 4% this month.
Meanwhile, think tanks of the market have become divided over the BoE’s monetary policy decision on Thursday. Analysts at Goldman Sachs now expect the BoE to cut interest rates by 25 bps to 3.75% on Thursday, while ING anticipates the UK central bank to hold rates steady with a 5-4 vote split.
Daily digest market movers: Pound Sterling trades sideways against US Dollar
- The Pound Sterling consolidates around 1.3140 against the US Dollar (USD) during the European trading session on Monday. The GBP/USD pair turns sideways after finding a temporary floor near an over six-month low around 1.3100 posted on Friday. The pair is expected to remain under pressure as the US Dollar trades firmly due to receding Federal Reserve (Fed) dovish expectations for the December policy meeting.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near the three-month high of 99.85 posted on Friday.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to the 3.50%-3.75% range in the December meeting has eased to 69.3% from 94.4% a week ago.
- Fed dovish expectations have cooled down significantly following comments from Fed Chair Jerome Powell in the press conference on Wednesday, signaling that the central bank has no significant plans to cut interest rates in December.
- Powell stated that the December cut is “far from a foregone conclusion”, clarifying that there were “strongly different views” in the meeting, and the takeaway is that “we haven't made a decision about December", Bloomberg reported.
- Meanwhile, comments from a few Fed officials on Friday showed that they are concerned over upside inflation risks, with price pressures remaining well-above the central bank’s 2% target.
- “Need to maintain some restriction to bring down inflation,” Cleveland Fed Bank President Beth Hammack said at a conference hosted by the Fed Bank of Dallas on Friday.
- In Monday’s session, investors will focus on the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for October, which will be released at 15:00 GMT. The Manufacturing PMI is expected to come in at 49.2, marginally higher than 49.1 in September. However, a figure below 50.0 is considered a contraction in the business activity.
Technical Analysis: Pound Sterling finds cushion near 1.3100
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The Pound Sterling finds temporary support against the US Dollar near an over six-month low at around 1.3100 posted on Friday. The outlook of the Cable remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3290.
The 14-day Relative Strength Index (RSI) slumps to near 30.00, indicating that the overall momentum is bearish.
Looking down, the psychological level of 1.3000 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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