Pound Sterling corrects further against US Dollar as Fed maintains restrictive policy stance
- The Pound Sterling declines to near 1.2920 against the US Dollar as the Fed is not in a rush to move to interest rate cuts.
- The Fed sees high uncertainty over the US economic outlook amid new policies from US President Trump.
- BoE Bailey is confident that interest rates are on a gradually declining path.
The Pound Sterling (GBP) extends correction to near 1.2920 against the US Dollar (USD) in European trading hours on Friday. The GBP/USD pair weakens as the US Dollar extends recovery amid growing expectations that the Federal Reserve (Fed) will not cut interest rates soon. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gathers strength to break above the key resistance of 104.00.
The Fed expressed that it is in no hurry to move to interest rate cuts after leaving them unchanged in the range of 4.25%-4.50% on Wednesday. The comments from the Fed regarding holding interest rates at their current levels were based on “unusually elevated” uncertainty over the United States’ (US) economic outlook due to the implementation of significant policy changes under the administration of US President Donald Trump.
Fed Chair Jerome Powell said in the press conference on Wednesday that tariff policies by US President Trump could push inflation higher and weigh on growth in the near term.
According to the CME FedWatch tool, the Fed is almost certain to keep interest rates unchanged in the May meeting, but there is a 73% chance the central bank can cut them in June.
Globally, investors’ risk appetite is expected to remain capped as President Trump is poised to impose reciprocal tariffs on April 2, which means equal tariffs for the same products imported and exported by the US with his trading partners. Such a scenario will be unfavorable for economic growth across the globe.
Daily digest market movers: Pound Sterling drops after BoE’s policy decision
- The Pound Sterling trades lower against its major peers, except the Japanese Yen (JPY), on Friday. The British currency weakens after the Bank of England (BoE) left interest rates unchanged at 4.5% on Thursday. The Pound drops even though the steady interest rate decision seemed slightly hawkish.
- Eight out of nine Monetary Policy Committee (MPC) members voted for keeping borrowing rates at their current levels, while policymaker Swati Dhingra supported a 25 basis points (bps) interest rate reduction. Economists expected that two officials would vote for a quarter-to-a-percent reduction in interest rates.
- BoE Governor Andrew Bailey said there is a lot of uncertainty at the moment, but he still thinks the monetary policy is on a “gradually declining path”.
- Meanwhile, fears of persistently high United Kingdom (UK) inflation remain solid amid steady wage growth. The Office for National Statistics (ONS) reported on Thursday that Average Earnings Excluding Bonuses, a key measure of wage growth, rose steadily by 5.9% in three months ending January. High wage growth has remained a key contributor to stubborn inflation in the services sector, which BoE officials closely track for decision-making on interest rates.
- For fresh cues on the current status of UK inflation, investors will focus on the Consumer Price Index (CPI) data for February, which will be released on Wednesday. In January, the headline CPI accelerated at a robust pace of 3% compared to the 2.5% rise seen in December.
Technical Analysis: Pound Sterling falls to near 1.2920
The Pound Sterling slumps to near 1.2920 against the US Dollar on Friday after failing to extend its upside above the four-month high of 1.3000 the previous day. GBP/USD bulls take a breather as the 14-day Relative Strength Index (RSI) reached overbought levels above 70.00. However, this doesn’t reflect that the bullish trend is over. The upside trend could resume once the momentum oscillator cools down to near 60.00.
Advancing 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2855 and 1.2712, respectively, suggest that the overall trend is bullish.
Looking down, the 50% Fibonacci retracement, plotted from late-September high to mid-January low, at 1.2770 and the 38.2% Fibo retracement at 1.2615 will act as key support zones for the pair. On the upside, the October 15 high of 1.3100 will act as a key resistance zone.
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, also known as ‘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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