Pound Sterling holds strength on improved UK economic outlook

Source Fxstreet
Apr 24, 2024 08:17
  • The Pound Sterling holds recovery to near 1.2450 on an upbeat preliminary S&P Global/CIPS PMI report for April.
  • BoE Haskel wants to see more slack in labor demand to gain confidence that inflation will sustainably return to the 2% target.
  • Weak US PMI for April weighed on the US Dollar.

The Pound Sterling (GBP) turns sideways at around 1.2450 against the US Dollar (USD) in Wednesday’s European session after bouncing back strongly from a five-month low at around 1.2300 earlier in the week. The GBP/USD pair capitalizes on strong United Kingdom preliminary PMI numbers for April and a steep correction in the US Dollar.

On Tuesday, the S&P Global/CIPS reported that new business volumes increased across the private sector as a whole in April. “The rate of growth was the strongest since May 2023, but the expansion was centred on the service economy as manufacturers saw a moderate downturn in order books.”

Strong new business volumes usually indicate an upbeat consumer spending outlook, which could boost inflationary pressures and allow the Bank of England (BoE) to delay interest-rate cuts. The scenario bodes well for the Pound Sterling.

The USD came under pressure after S&P Global surprisingly reported weak preliminary US PMI numbers for April. The Manufacturing PMI dropped below the 50.0 threshold, signalling a contraction in the sector, and the Services PMI fell sharply to 50.9. The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, attempted to establish firm footing near 105.70.

Daily digest market movers: Pound Sterling eyes more upside, US Dollar strives for support

  • The Pound Sterling aims to extend upside above the immediate resistance of 1.2450 against the US Dollar due to multiple tailwinds. The uncertainty about when the Bank of England could start reducing interest rates and strong preliminary PMI data for April reported by S&P Global/CIPS on Tuesday have boosted demand for the Pound Sterling.
  • Traders remain split between June and August policy meetings as the start of the easing cycle. "It is between June and August, we are leaning slightly towards August on the basis that one of the key things the Bank is looking at is services inflation," said James Smith, economist at ING Financial Markets. "If services inflation is a little bit stickier, I think that tilts the balance a little bit further towards August over June, but it's a pretty close call to be honest."
  • Also, distinct commentaries from BoE policymakers keep the timing of the BoE’s first interest rate cut uncertain. Last week, BoE deputy governor Dave Ramsden said inflation could decline faster than the pace projected by the central bank in its latest forecasts. Ramsden remains confident that inflation will return to the 2% target in May and will remain there for the next three years.
  • On the contrary, BoE policymaker Jonathan Haskel is worried about inflation remaining persistent due to tight labor market conditions. Haskel said, "The labour market is central to the inflation aspect." He added that he wants to see the job market easing further to be confident about inflation returning to the 2% target, reported Reuters.
  • On the economic data front, the S&P Global/CIPS reported stronger-than-expected preliminary PMI data for April on Tuesday. Surprisingly, the Services PMI jumped to 54.9 from the prior reading of 53.1. Investors had forecasted the Services PMI to drop slightly to 53.0. On the contrary, the preliminary Manufacturing PMI surprisingly dropped below the 50.0 threshold that separates expansion from contraction after being in the expansion territory since January. The factory PMI fell sharply to 48.7 from expectations and the prior reading of 50.3. 

Technical Analysis: Pound Sterling rises to 1.2450

The Pound Sterling recovers sharply from a five-month low of 1.2300 against the US Dollar. The GBP/USD pair moved higher to 1.2450 on Tuesday and remains at around this level at the time of writing. The upside is limited near the supply zone, placed in a tight range of 1.2500-1.2520. The near-term outlook of the Cable remains weak as the 20-day Exponential Moving Average (EMA) at 1.2509 is declining.

The 14-period Relative Strength Index (RSI) rebounds to 40.00, which could act as a ceiling ahead. The speculation for a bullish reversal could emerge if the momentum oscillator decisively breaks above 40.00.

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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