Pound Sterling remains on backfoot as BoE rate-cut bets surge
- The Pound Sterling ranges against the US Dollar near 1.2850 with a focus on Fed/BoE policy meetings.
- Traders raise BoE rate-cut bets despite stubborn UK service inflation.
- Investors see the Fed delivering a dovish interest rate guidance.
The Pound Sterling (GBP) trades in a tight range near 1.2850 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair consolidates inside Monday’s trading range with a focus on interest-rate decisions by the Federal Reserve (Fed) and the Bank of England (BoE) on Wednesday and Thursday, respectively.
The Fed is widely anticipated to maintain the status quo for the eighth consecutive meeting. Therefore, investors will keenly focus on the monetary policy statement and Fed Chair Jerome Powell’s press conference to get fresh cues about rate cut prospects.
Market experts see the Fed sending a clear message that rate cuts are highly likely in the September meeting amid significant progress in inflation declining towards the bank’s target of 2% and increasing risks to labor market strength. The scenario would be unfavorable for the US Dollar and bond yields. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major peers, edges higher to 104.70. 10-year US Treasury yields rise to near 4.18%.
In Tuesday’s session, investors will look to United States (US) JOLTS Job Openings data for June, which will be published at 14:00 GMT. The report is expected to show that fresh job vacancies were lower at 8.03 million from the former release of 8.14 million.
This week, many economic data are lined up for release, which will impact the next move in the US Dollar, such as ADP Employment Change, ISM Manufacturing PMI, and Nonfarm Payrolls (NFP) for July.
Daily digest market movers: Pound Sterling underperforms against its major peers
- The Pound Sterling exhibits a weak performance against its major peers, except the Japanese Yen, on Tuesday. The British currency weakens as market speculation for the BoE to begin reducing interest rates from the August meeting, which will be announced on Thursday, has improved further. Trades see a little over 58% chance that the BoE will cut its key borrowing rates by 25 basis points (bps) to 5%, Reuters reported.
- Investors expect that the BoE’ rate-cut decision will be a tough call, with 5-4 vote split as inflation in the service sector is significantly higher than where it needs to be to boost policymakers’ confidence for rate cuts. United Kingdom’s (UK) annual service inflation remained higher at 5.7% in June than bank’s forecast of 5.1%.
- In the last monetary policy meeting, BoE Governor Andrew Bailey said policymakers saw the decision to keep interest rates steady as ‘finely balanced’, which boosted expectations that the central bank will cut interest rates in August.
- Meanwhile, fears of price pressures remaining persistent have deepened as UK Finance Minister Rachel Reeves vowed to deliver above-inflation pay rises worth 9.4 billion pounds for workers in the public sector such as doctors and teachers. Reeves told Parliament, "I have today set out our decision to meet the recommendation of the pay review bodies because the previous government failed to prepare for these recommendations in their departmental budgets," Reuters reported. Reeves announced that she will hold her first fiscal budget on October 30.
Technical Analysis: Pound Sterling juggles near 1.2850
The Pound Sterling is going through a mean-reversion move toward the lower boundary of the Rising Channel chart pattern on a daily timeframe. The GBP/USD pair fell on the back foot 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 a be cushion for the momentum oscillator.
On the downside, the round-level of 1.2800 will be a crucial support zone for the Pound Sterling bulls. Meanwhile, the two-year high near 1.3140 will be a key resistance zone for the Cable.
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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