Pound Sterling trades broadly stable as Trump threatens Fed independence
- The Pound Sterling consolidates around 1.3460 against the US Dollar on Wednesday.
- Fed’s Cook announces that she will file a lawsuit against her termination by US President Trump.
- BoE’s Mann expressed a hawkish stance on interest rate guidance.
The Pound Sterling (GBP) trades in a tight range around 1.3460 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair consolidates as the US Dollar trades broadly stable, following the announcement from Federal Reserve (Fed) Governor Lisa Cook that she will file a lawsuit against her termination by United States (US) President Donald Trump.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks up to near 98.40.
On Tuesday, Fed Cook’s lawyer said in a statement, “His [Trump] attempt to fire her, based solely on a referral letter, lacks any factual or legal basis. We will be filing a lawsuit challenging this illegal action,” Reuters reported.
Regardless of the outcome of the lawsuit filed by Fed Governor Cook, market experts believe that Trump’s attempt to politicize the Fed is a big threat to the US Dollar’s dominance. "Investors will naturally start to increasingly question the independence of the Fed, which would result in a steeper yield curve and a weaker dollar,” analysts at ING said, Reuters reported.
Experts also believe that the entry of one more of Trump’s guys into the rate-setting committee would strengthen the bid for more interest rate cuts in the near term.
According to the CME FedWatch tool, there is an 87% chance that the Fed will cut interest rates in the September monetary policy meeting.
Pound Sterling trades calmly on BoE Mann’s hawkish remarks
- The Pound Sterling trades broadly stable, on a calm day, on Wednesday as Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann has argued in favor of holding interest rates at their current levels for a longer period as inflation is proving to be persistent, until any downside risks to economic growth materialize.
- "A more persistent hold on Bank Rate is appropriate right now, to maintain the tight - but not tighter - monetary policy stance needed to lean against inflation persistence persisting," Mann said on Tuesday in a speech at a conference to mark the Bank of Mexico's (Banxico) 100th anniversary, Reuters reported.
- In the last three months, inflation in the United Kingdom (UK) has been accelerating at a faster pace. In July, the headline Consumer Price Index (CPI) rose at an annual pace of 3.8%, the highest level seen in almost 18 months.
- In the policy meeting earlier this month, the BoE reduced interest rates by 25 basis points (bps) to 4%, with a slim majority, and guided a “gradual and careful” monetary policy expansion.
- Going forward, the GBP/USD pair will be influenced by the US Personal Consumption Expenditures Price Index (PCE) data for July, which will be released on Friday. The core PCE inflation data, which is closely tracked by Fed officials as it excludes volatile food and energy items, is expected to have grown at an annual pace of 2.9%, faster than the prior release of 2.8%.
Technical Analysis: Pound Sterling consolidates around 1.3460
The Pound Sterling trades sideways around 1.3460 against the US Dollar on Wednesday. The overall trend of the GBP/USD pair is bullish as it remains above the 200-day Exponential Moving Average (EMA), which trades around 1.3186.
The Cable is also forming an inverse Head and Shoulder (H&S) chart pattern, which leads to a bullish reversal after a corrective or downside move. The neckline of the H&S pattern is placed around 1.3580.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sharp volatility contraction.
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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