Pound Sterling declines amid uncertainty ahead of Fed/BoE policy meetings
- The Pound Sterling weakens as investors expect the BoE to cut interest rates on Thursday.
- A few BoE policymakers may hesitate to vote for a dovish decision due to high inflation in the UK service sector.
- The Fed is widely anticipated to maintain the status quo.
The Pound Sterling (GBP) underperforms against its major peers in Monday’s London session. The British currency weakens ahead of the Bank of England (BoE) monetary policy meeting, which is scheduled for Thursday. The BoE is expected to cut its interest rates by 25 basis points (bps) to 5%. This will be the first rate-cut decision in the BoE in more than four years since pandemic-led stimulus forced global central banks to pivot to a restrictive policy framework in an attempt to normalize inflated world markets.
Market experts expect that the BoE's rate-cut move will be tough, as high inflation in the service sector remains a concern for policymakers. Though annual headline inflation has returned to the desired rate of 2%, high service inflation could dampen its sustainability.
Meanwhile, the arrival of United Kingdom (UK) Prime Minister Keir Starmer into Parliament with an absolute majority has strengthened the economic outlook. An improvement in activities in manufacturing and the service sector could lead to a rise in input prices, which could also revamp price pressures again.
Daily digest market movers: Pound Sterling refreshes two-week low against US Dollar
- The Pound Sterling posts a fresh two-week low near 1.2810 against the US Dollar (USD) in Monday’s European trading hours. The GBP/USD pair weakens as the US Dollar edges higher amid uncertainty ahead of the Federal Reserve’s (Fed) monetary policy announcement on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to 104.50.
- The Fed is widely anticipated to leave interest rates unchanged in the range of 5.25%-5.50% for the eighth time in a row. Therefore, market participants will keenly focus on the monetary policy statement and the press conference of Fed Chair Jerome Powell to know whether policymakers are comfortable with market speculation of two rate cuts this year and choosing the September meeting to kick off the much-awaited policy-easing cycle.
- Financial markets expect the Fed to acknowledge significant progress in inflation declining towards the bank’s target of 2% and increasing risks to the labor market. This would indicate the Fed’s readiness for interest-rate reduction.
- Contrary to market expectations, Bank of America (BofA) economists argued on Friday that cooling consumer demand and inflation may not be proceeding fast enough to allow for as much policy easing as financial markets expect. They added, "We remain comfortable with our forecast that cuts will start in December, but upcoming inflation and employment data could tip the scale to an earlier cut," Reuters reported.
- Apart from the Fed policy, investors will also focus on a string of United States (US) economic data such as JOLTS Job Openings for June, ADP Employment Change, ISM Manufacturing Purchasing Managers Index (PMI), and Nonfarm Payrolls data for July.
Technical Analysis: Pound Sterling falls below 20-day EMA
The Pound Sterling declines toward the lower boundary of the Rising Channel chart pattern on a daily timeframe. The GBP/USD pair fell on the backfoot after breaking below the crucial support of 1.2900. The Cable drops below the 20-day Exponential Moving Average (EMA) near 1.2860, suggesting uncertainty in the near-term trend.
The 14-day Relative Strength Index (RSI) declines toward 40.00, which would be a cushion for the momentum oscillator.
On the downside, the round-level support of 1.2800 will be a crucial support zone for the Pound Sterling bulls. On the other hand, a two-year high near 1.3140 will be a key resistance zone for the pair.
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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