Pound Sterling needs more cues about timing of BoE rate cuts
- Pound Sterling treads with caution amid volatile market sentiment.
- High UK wage growth and service inflation are keeping price pressures sticky.
- Investors await the UK and US Manufacturing PMIs for fresh guidance.
The Pound Sterling (GBP) finds temporary support in Friday’s European session after closing negatively on Thursday. The GBP/USD pair may face more heat as higher monthly United States core Personal Consumption Expenditure Price Index (PCE) data for January has capped hopes of rate cuts by the Federal Reserve (Fed) in the June policy meeting.
US monthly core inflation data rose by 0.4% in January against a 0.1% increase in December, which was revised down from 0.2%. Price pressures were expected to grow at a higher pace, but the momentum is inconsistent with the agenda of achieving a 2% inflation target.
Meanwhile, a slightly uncertain market mood keeps the Pound Sterling on edge. In the broader term, the Pound Sterling could benefit from hopes that the Bank of England (BoE) will begin reducing interest rates after the Fed.
Investors anticipate that the BoE and the Fed will start cutting interest rates in August and June, respectively. This will ease policy divergence between the central banks for some time. The Pound Sterling would attract higher foreign inflows if the BoE maintained a hawkish stance for a longer period than other central banks.
In today’s session, the UK’s S&P Global/CIPS Manufacturing PMI and the US ISM Manufacturing PMI for February will be in focus. The UK Manufacturing PMI is expected to remain unchanged at 47.1. While the US Manufacturing PMI is anticipated to have risen to 49.5 from 49.1 in January.
Daily Digest Market Movers: Pound Sterling awaits UK/US Manufacturing PMI data
- Pound Sterling discovers interim support near 1.2600 after a sharp sell-off. The downside remains favored amid a cautious market mood.
- The US Dollar Index, which measures Greenback’s value against six major currencies, remains firm above 104.00.
- The market sentiment is slightly uncertain as the United States core PCE Price Index data for January, released on Thursday, was in line with expectations. The annual core inflation data indicated that inflation is gradually declining but is insufficient to allow Federal Reserve policymakers to favor normalization of policy stance at the current stage.
- The annual core PCE Price Index was the lowest in three years at 2.8%, as expected by market participants. The monthly core inflation data grew in line with expectations by 0.4%. The pace at which monthly price pressures rose is higher than what is required to bring down inflation to the 2% target.
- The underlying inflation data has kept hopes of rate cuts in the June meeting alive. As per the CME FedWatch tool, traders see a 52% chance for a rate cut by 25 basis points (bps). The probability of a rate cut in June remains unchanged after the release of the crucial inflation data.
- On the United Kingdom front, investors seek fresh cues about when the Bank of England will start reducing interest rates.
- The latest poll from Reuters showed that a rate-cut move from the BoE will come in the third quarter of this year. A slim majority is expecting it in the month of August.
- Currently, BoE policymakers believe that rate cuts would be discussed only after gaining confidence that inflation will come down to the desired rate of 2%.
- BoE policymakers are worried about the pace at which wage growth and service inflation are rising. The momentum in the aforementioned inflation indicators is higher than necessary for returning inflation sustainably to the 2% target.
Technical Analysis: Pound Sterling manages to hold above 1.2600
Pound Sterling finds buying interest near the round-level support of 1.2600. The pair drops toward the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.2640.
The near-term trend is sideways as the asset oscillates inside the Descending Triangle formation on a daily timeframe. The downward-sloping border of the aforementioned chart pattern is placed from December 28 high at 1.2827, while the horizontal support is plotted from December 13 low near 1.2500.
A Descending Triangle pattern exhibits indecisiveness among market participants but with a slight downside bias due to the formation of lower highs and flat lows.
The 14-period Relative Strength Index (RSI) remains inside the 40.00-60.00 region, indicating a sharp contraction in volatility.
Pound Sterling FAQs
What is the Pound Sterling?
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).
How do the decisions of the Bank of England impact on the Pound Sterling?
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.
How does economic data influence the value of the Pound?
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.
How does the Trade Balance impact the Pound?
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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