Pound Sterling exhibits weak performance ahead of preliminary S&P Global PMIs
- The Pound Sterling dips amid firm BoE rate-cut prospects.
- Investors await the preliminary US/UK S&P Global PMIs for July.
- The Fed is expected to pivot to policy normalization in September.
The Pound Sterling (GBP) weakens against its major peers, except Asia-Pacific currencies, in Wednesday’s London session. The British currency remains defensive amid growing speculation that the Bank of England (BoE) will begin cutting interest rates in August.
Market experts see the United Kingdom’s (UK) economy struggling to cooperate with BoE’s high interest rates. The consequences of a restrictive monetary policy stance are clearly visible in households’ spending, as the UK’s Retail Sales, a key measure of consumer spending that prompts inflationary pressures, contracted at a faster-than-expected pace in June.
Meanwhile, BoE officials refrain from endorsing rate cuts due to high inflation in the service sector. UK service inflation grew steadily by 5.7% in June.
With preliminary UK S&P Global/CIPS Purchasing Managers’ Index (PMI) data for July in focus, investors will look for fresh cues about economic health. The Composite PMI is estimated to have expanded at a higher pace of 52.6 from the former release of 52.3 due to an increase in activities in the manufacturing as well as service sectors. The confidence of UK employers in economic prospects has also improved as the victory of UK Prime Minister Keir Starmer with an absolute majority has brought political stability.
Daily digest market movers: Pound Sterling underperforms against major peers
- The Pound Sterling weakens to nearly 1.2880 against the US Dollar (USD) in European trading hours on Wednesday. The GBP/USD pair extends its correction below 1.2900 amid increasing risk aversion. Meanwhile, the US Dollar clings to gains ahead of a slew of United States (US) economic data. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near a weekly high at around 104.50.
- In Wednesday’s session, investors will also focus on the preliminary US S&P Global PMI data for July, which will be published at 13:45 GMT. The report is expected to show that the Manufacturing PMI expanded at a nominal pace of 51.7 from June’s reading of 51.6. The Services PMI, a measure of activities in the service sector, is estimated to have expanded at a slower pace of 54.4 from the prior release of 55.3. The economic data will convey the current economic health.
- This week, the main triggers for the US Dollar will be the preliminary annualized Q2 Gross Domestic Product (GDP) and the Personal Consumption Expenditures Price Index (PCE) data for June, which will be published on Thursday and Friday, respectively. The US economy is estimated to have grown by 1.9% from the former release of 1.4%.
- Investors will keenly focus on the core PCE inflation, the Federal Reserve’s (Fed) preferred inflation measure, to get fresh cues about when the central bank will start reducing interest rates. Currently, financial markets expect the Fed to begin lowering its key borrowing rates in September.
- Meanwhile, investors seek fresh developments on the US presidential elections in November. Market experts see Donald Trump winning the elections despite Democrats nominating Vice President Kamala Harris as their leader.
Technical Analysis: Pound Sterling declines below 1.2900
The Pound Sterling falls below the crucial support of 1.2900 against the US Dollar. The GBP/USD pair declines to near the horizontal support plotted from the March 8 high near 1.2900, which used to be a resistance for the Pound Sterling bulls. The Cable has dropped near the 20-day Exponential Moving Average (EMA), which trades around 1.2860.
The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded. However, the bullish bias remains intact.
On the upside, a two-year high near 1.3140 will be a key resistance zone for the pair. On the other hand, the upward-sloping trendline from the April 22 low will act as a major support zone around 1.2750.
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.
Recommended Articles
