Pound Sterling exhibits strength as traders scale back BoE rate cut bets

Source Fxstreet
Apr 18, 2024 08:16
  • The Pound Sterling moves higher to 1.2480 as investors see the BoE delaying rate cuts.
  • UK’s stable wage growth is limiting the slowdown in price pressures.
  • The US Dollar corrects despite the Fed’s stance towards keeping interest rates higher for a longer period.

The Pound Sterling (GBP) extends its upside to 1.2480 in Thursday’s European session. The GBP/USD pair moves higher, driven by a steep correction in the US Dollar and rising expectations that the Bank of England (BoE) will delay rate cuts until the November meeting. Like the Federal Reserve (Fed), the BoE is also expected to delay rate cuts, which has faded potential fears of policy divergence between them.

The major catalyst that forced traders to pare BoE early rate cuts is the slow progress in inflation declining to the 2% target due to steady wage growth. The labor market report for the quarter ending February showed that Average Earnings including bonuses grew steadily by 5.6%, higher than expectations of 5.5%. 

For inflation to return to the 2% target, the annual wage growth excluding bonuses should be close to 3.5%. Higher wage growth feeds inflationary pressures as businesses pass on labor cost to end consumers. Also, households with higher income for disposal ramp up overall demand in the economy.

Daily digest market movers: Pound Sterling moves higher while US Dollar corrects

  • The Pound Sterling rises to 1.2480 as persistence in the United Kingdom’s inflation data for March forced traders to price out expectations for the Bank of England pivoting to rate cuts in the September meeting. 
  • Investors expect that the last mile for inflation to return to the 2% target will be bumpy. Currently, financial markets anticipate the BoE reducing interest rates only once this year in the November meeting. 
  • The UK Inflation data released on Wednesday indicated that annual core CPI data, which strips off volatile food and energy prices, grew by 4.2% year-over-year in March, above the consensus of 4.1% but significantly decelerated from February’s reading of 4.5%. The core inflation data is the Bank of England’s preferred inflation measure for decision-making on interest rates. 
  • A lower-than-expected decline in price pressures in March, combined with steady wage growth data for the three months ending February, forced traders to pare rate cut bets for the September meeting.
  • After the release of the inflation data, BoE Governor Andrew Bailey said, “We’re pretty much on track for where we thought we would be in February on inflation. Bailey remains optimistic about a further drop in inflation next month. When asked about the impact of Middle East tensions, Bailey commented that the Oil price has not leaped as much as expected and the consequences of Middle East tensions are less than feared, reported FXStreet. https://www.fxstreet.com/news/boes-a-bailey-inflation-will-drop-strongly-in-the-next-month-202404171612 
  • Apart from the revision in BoE rate cut prospects, the GBP/USD pair has benefitted from a slight correction in the US Dollar. The US Dollar Index (DXY), which tracks the US Dollar against six major currencies, fell sharply to 105.75 from a fresh five-month high of 106.40. The near-term demand for the US Dollar remains intact as Federal Reserve (Fed) policymakers keep emphasising the need for interest rates to remain higher for a longer period until they get convinced that inflation will return sustainably to the 2% target.

Technical Analysis: Pound Sterling eyes 1.2500

The Pound Sterling aims for firm footing after discovering strong buying interest near the round-level support of 1.2400. The GBP/USD pair rebounds from 1.2400 and focuses on recapturing the psychological resistance of 1.2500. 

The near-term outlook of the Cable remains bearish due to a breakdown of the Head and Shoulder pattern and a declining 20-day Exponential Moving Average (EMA) near 1.2560.

In addition, the 14-period Relative Strength Index (RSI) oscillates inside the bearish range of 20.00-40.00, suggesting momentum leaned to the downside.

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, aka ‘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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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