The Pound Sterling (GBP) trades in a limited zone as investors step to the sidelines ahead of a busy week. The GBP/USD pair struggles for a direction ahead of the interest rate decisions by the Bank of England (BoE) and the Federal Reserve (Fed), which are expected to leave rates unchanged for the fourth time in a row.
While the BoE is expected to hold steady, guidance on the interest rate outlook will be the key factor for further action in the Pound Sterling. The BoE is in a balancing act between vulnerable economic conditions in the domestic and the overseas market and stubborn price pressures. The maintenance of higher interest rates for a longer period by the BoE could dampen labor market and demand conditions while a dovish signal will ramp-up price pressures again.
Market mood seems broadly cautious due to Middle East tensions and Fed’s monetary policy announcement. Investors will keenly watch whether the Fed will choose the March or May meeting for the first rate cut after a prolonged “rate-tightening” campaign.
Pound Sterling remains topsy-turvy near the crucial resistance of 1.2700 ahead of crucial economic events. On a daily time frame, the GBP/USD pair demonstrates a Descending Triangle chart pattern formation, which indicates a sharp volatility contraction but with an upside bias.
Downward-sloping trendline of the aforementioned chart pattern is drawn from 28 December 2023 high at 1.2827 while the horizontal support is plotted from 21 December 2023 low at 1.2612. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates a sideways performance ahead.
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.