Pound Sterling refreshes two-week low as traders trim Fed dovish bets
- The Pound Sterling drops to near 1.3400 against the US Dollar as the latter trades firmly.
- Investors await Fed Powell’s speech for fresh cues on the monetary policy outlook.
- Flash UK S&P Global Composite PMI for August beats estimates.
The Pound Sterling (GBP) posts a fresh two-week low around 1.3400 against the US Dollar (USD) during the European trading session on Friday. The GBP/USD pair extends its losing streak for the fifth trading day as the US Dollar continues to outperform on the back of easing Federal Reserve (Fed) dovish speculation for the September monetary policy meeting.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, refreshes a 10-day high near 98.80 during European trading hours.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) in September has eased to 73.3% from 85.4% seen a week ago.
Dovish expectations have eased ahead of Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium, scheduled at 14:00 GMT, in which he is expected to reiterate his argument that monetary policy adjustments are inappropriate until the central bank gains absolute clarity about the tariff-impact on inflation and the economy.
"With another inflation and payrolls print still due before the September meeting, Powell has every reason to stay patient and keep optionality open," analysts at Saxo said.
Meanwhile, the comments from Kansas City Fed Bank President Jeffrey Schmid on Thursday also signaled that there is no rush for interest rate cuts as inflation is still above the central bank’s target of 2%. "Not in a hurry to cut interest rates as inflation number likely closer to 3 than 2, and there is work to do," Schmid said, Reuters reported. Investors should note that Schmid is a voting member of the Federal Open Market Committee (FOMC).
Daily digest market movers: Pound Sterling trades calmly against its peers
- The Pound Sterling trades broadly stable against its major peers on Friday after the release of the upbeat preliminary S&P Global Purchasing Managers’ Index (PMI) data for August on Thursday.
- The report showed that the Composite PMI expanded at a faster-than-expected pace to 53.0 due to a robust growth in activities in the services sector. The agency also reported that new business has returned to growth in August after declining moderately in July. However, the continuation of lay-offs and rising prices charged by private players to offset the impact of an increase in National Insurance (NI) costs will remain key concerns for Bank of England (BoE) officials.
- The BoE would need to perform a delicate balancing act while announcing the interest rate decision in the September monetary policy meeting due to weak labor demand and escalating inflationary pressures.
- In the policy meeting earlier this month, the BoE reduced interest rates by 25 bps to 4%, with a narrow majority, and reiterated a “gradual and careful” monetary easing guidance.
- This week, the UK Consumer Price Index (CPI) report for July showed that both headline and core inflation grew at a faster-than-projected pace of 3.8% on year.
- On the global front, the uncertainty over a truce between Russia and Ukraine has increased after Moscow’s mass overnight attack in Kyiv on Thursday. This came at a time when US President Donald Trump is pushing both nations to come to the table to end the three-year-long war. “Now the signals from Russia are simply, to be honest, indecent," Ukrainian President Volodymyr Zelenskiy said, Reuters reported.
- Earlier this week, US President Trump met with Ukrainian President Zelenskiy to discuss concessions on ending the war in Ukraine after meeting with Russian leader Vladimir Putin on August 15.
Technical Analysis: Pound Sterling drops to near 1.3400
The Pound Sterling slides to near 1.3400 against the US Dollar on Friday. The near-term trend of the GBP/USD pair has become uncertain as it has dropped below the 20-day Exponential Moving Average (EMA), which trades around 1.3450.
The 14-day Relative Strength Index (RSI) drops towards 40.00. A fresh bearish momentum would emerge if the RSI breaks below that level.
Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.
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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