Pound Sterling consolidates in holiday-shortened week, BoE policy in focus
- The Pound Sterling juggles in a tight range around 1.2550 against the US Dollar as investors shift focus to the BoE policy decision.
- The BoE could provide meaningful cues on the timing of rate cuts amid easing price pressures.
- Slower US job growth and a contraction in the Services PMI have raised concerns over the economic outlook.
The Pound Sterling (GBP) is stuck in a tight range around 1.2550 against the US Dollar (USD) in Monday’s London session. The GBP/USD pair is expected to remain less volatile and will be guided by the market sentiment as the United Kingdom markets are closed on account of Early May.
The GBP/USD struggles for a direction as the US Dollar consolidates in the aftermath of United States Nonfarm Payrolls (NFP) and the ISM Services Purchasing Managers Index (PMI) data for April. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, trades sideways above 105.00.
The overall data indicated that the US economy is losing strength: fewer jobs were added, the Unemployment Rate rose to 3.9%, wage growth slowed, and the ISM Services PMI fell below the 50.0 threshold – the level that separates expansion from contraction – to the lowest reading since December 2022.
Despite the downbeat overall picture presented by Friday’s data, investors didn’t bring forward Federal Reserve (Fed) rate cut bets from September as the ISM Prices Paid subindex for the service sector rose significantly to 59.4 from 53.4 in March. High Prices Paid for service sector inputs renewed fears of inflation remaining higher, which is expected to allow the Fed to emphasize maintaining interest rates restrictive for a longer period. Respondents to the ISM survey said: “Inflation is raising our unit cost on products and services when compared to last year’s expenditures.”
Daily digest market movers: Pound Sterling follows US Dollar’s footprints
- The Pound Sterling consolidates in a tight range around 1.2550 as investors shift focus to the Bank of England’s (BoE) interest rate decision, which will be announced on Thursday. The BoE is widely anticipated to hold interest rates steady at 5.25% for the sixth time in a row. Therefore, investors will keenly focus on the BoE’s guidance on interest rates.
- The recent commentary from BoE Governor Andrew Bailey indicated that he is confident that headline inflation will return to the desired rate of 2% in April. This suggests that the central bank could deliver a slightly dovish commentary on the interest rate outlook and provide a concrete timeframe for starting to reduce interest rates.
- Reuters shows that financial markets anticipate the BoE reducing interest rates from the September meeting. Traders have also priced in one more rate cut by year-end. The speculation for only two rate cuts is significantly lower than the six anticipated at the start of the year. Andrew Baily also commented in the last press conference after the bank’s policy decision that market expectations for two or three rate cuts this year are not unreasonable.
- However, a few BoE policymakers are still worried about stubborn wage growth feeding service inflation. UK Average Earnings excluding bonus are at 6.0%, almost double what the BoE views as required to be consistent for bringing inflation down sustainably to the desired rate of 2%.
- Investors will also focus on how many BoE policymakers will join Swati Dhingra and vote to pivot to interest rate cuts. It is expected that BoE Deputy Governor Dave Ramsden could change its stance from neutral to dovish on interest rates. Investors’ confidence in Ramsden turning dovish escalated after he commented last month that risks of inflation remaining higher have receded. He also pointed out that inflation will not rebound again after returning to 2%, contrary to prior expectations that price pressure could revamp again.
Technical Analysis: Pound Sterling trades back and forth near 1.2550
The Pound Sterling trades inside Friday’s trading range during Monday’s European session. The GBP/USD pair formed a Shooting Star candlestick pattern on a daily timeframe on Friday as it reversed its initial gains after the US Services PMI Prices Paid rose significantly. The above-mentioned candlestick is a bearish reversal pattern and its formation near the crucial resistance of 1.2500-1.2600 adds to its strength.
A breakdown of the Shooting Star pattern would trigger if the air breaks below Friday’s low of 1.2522. The near-term outlook of the Cable is still positive as it is trading above the 20-day Exponential Moving Average (EMA), which trades around 1.2520.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
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.
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