Pound Sterling eyes more downside on firm BoE rate cut prospects

Source Fxstreet
Apr 23, 2024 08:23
  • The Pound Sterling drops to near 1.2300 as the BoE is expected to start reducing interest rates from August.
  • The S&P Global/CIPS UK preliminary PMI data for April will provide guidance on the economic outlook.
  • Two BoE policymakers are lined up to speak as investors seek clues about the interest-rate outlook.

The Pound Sterling (GBP) remains vulnerable at around 1.2300 in Monday’s London session. The GBP/USD is under pressure as the US Dollar (USD) holds strength on expectations that the US Federal Reserve (Fed) will maintain interest rates at their current levels for longer. 

United States Consumer Price Index (CPI) has turned out hotter-than-expected in the first three months of the year and the county’s economic outlook is strong, suggesting that current interest rate framework is appropriate. 

The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, is slightly positive above the crucial support of 106.00. Meanwhile, investors will shift focus to the core Personal Consumption Expenditure Price Index (PCE) data for March, which will be published on Friday. The monthly core PCE Price Index is estimated to grow steadily by 0.3%. Annually, the underlying inflation data is expected to soften to 2.6% from 2.8% in February.

On the United Kingdom front, investors await the S&P Global/CIPS preliminary PMI data for April, which will be published at 08:30 GMT. The Manufacturing PMI is expected to expand steadily by 50.3. The Services PMI is estimated to have declined slightly to 53.0 from 53.1.  

Daily digest market movers: Pound Sterling edges down while US Dollar exhibits strength

  • The Pound Sterling refreshes a five-month low near the round-level support of 1.2300 as investors see the Bank of England (BoE) pivoting to interest rate cuts sooner than the Fed. Last week, BoE Deputy Governor Dave Ramsden said that United Kingdom inflation will decline faster than expected and will return to the 2% target in May.
  • Dave Ramsden said: “Over the last few months, I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding, helped by improved inflation dynamics," Reuters reported. He added that inflation might prove weaker than BoE’s latest projections.
  • Ramsden’s soft guidance on the inflation outlook has prompted expectations that the BoE will start reducing interest rates earlier than previously expected. LSEG's (BOEWATCH) now prices 28 basis points (bps) of rate cuts in August and 56 bps in December versus 22 bps and 51 bps, respectively, at Friday's close, Reuters reported.
  • Market expectations for the BoE’s May policy meeting will be guided by commentaries from policymakers, as inflation data for the same month will be released after the interest rate decision. In Tuesday’s session, the speeches from BoE policymakers Jonathan Haskel and Huw Pill will be in focus. 
  • In March’s monetary policy meeting, Haskel, who remained a hawk, surprisingly voted for keeping interest rates unchanged at 5.25%. In early April, Haskel commented that rate cuts should be "a long way off." He added that the decline in the headline inflation is good news but the BoE cares more about the persistent and theerlying inflation, the Financial Times reported. High inflation in the UK economy has been majorly driven by persistent inflation in the service sector, which is fuelled by strong wage growth. In March, the annual Service inflation decelerated slightly to 6.0% from 6.1%. 

Technical Analysis: Pound Sterling trades close to five-month low near 1.2300

The Pound Sterling printed a fresh five-month low near 1.2300 on Monday. The GBP/USD pair extends its losing spell for fourth trading session on Tuesday as a breakdown of the Head and Shoulder chart pattern formed on a daily timeframe has weakened the near-term outlook.

Declining 20-day and 50-day Exponential Moving Averages (EMAs) at 1.2525 and 1.2600, respectively, indicate that the long-term outlook is bearish.

The 14-period Relative Strength Index (RSI) oscillates in the range of 20.00-40.00, indicating a strong bearish momentum. 

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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