Pound Sterling bounces back, outlook remains uncertain amid UK fiscal worries
- The Pound Sterling gains marginally against its peers at the start of the week.
- 30-year UK Gilt yields soared to near 5.56% amid ballooning UK fiscal debt.
- Investors await preliminary UK-US PMI data for September due on Tuesday.
The Pound Sterling (GBP) starts the week on a slightly positive note against its peers on Monday, bouncing back after facing intense selling pressure last week. However, the British currency remains on the back foot amid escalating United Kingdom (UK) fiscal worries, following a significant increase in Britain’s public borrowings.
The data showed on Friday that UK public sector net borrowing hit nearly £18 billion in August. Economists expected government borrowing to come in significantly lower at £12.5 billion.
Worries regarding UK public borrowings have led to a sharp increase in long-dated government gilt yields. 30-year UK Gilt yields trade firmly near 5.57% on Monday, a move that could restrict administration from announcing higher spending in the Autumn Budget scheduled in November.
Meanwhile, investors worry that Chancellor of the Exchequer Rachel Reeves could raise the tax burden to offset the impact of the increase in public spending already announced in July.
On the economic data front, investors will focus on the preliminary UK S&P Global Purchasing Managers’ Index (PMI) data for September, which will be released on Tuesday. The UK Services PMI is expected to come in lower at 53.6 compared to 54.2 in August.
In Monday’s session, investors will focus on a speech from Bank of England (BoE) Governor Andrew Bailey for fresh cues on the monetary policy outlook, which is scheduled at 18:00 GMT.
Daily digest market movers: Pound Sterling sees more downside against US Dollar
- The Pound Sterling gains temporary ground near a two-week low around 1.3450 against the US Dollar (USD) on Monday. The GBP/USD pair seems unlikely to hold strength as the US Dollar trades firmly since the announcement of an interest rate cut by the Federal Reserve (Fed) on Wednesday.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades near a fresh one-week high around 97.80 at the time of writing.
- Theoretically, lower interest rates by the Fed bode poorly for the US Dollar. However, the reason behind the US Dollar’s strong recovery move seems to be that market participants had already priced in an interest rate cut by the central bank.
- On Wednesday, the Fed lowered interest rates by 25 basis points (bps) to the 4.00%-4.25% range amid cracks in the labor market, and signaled at least one more cut in the remainder of the year.
- Going forward, investors will focus on Fed Chair Jerome Powell’s speech at the Greater Providence Chamber of Commerce 2025 Economic Outlook Luncheon, which is scheduled on Tuesday. Investors would like to get more cues about the Fed’s monetary policy outlook.
- On Tuesday, market participants will also focus on the preliminary US S&P Global PMI data for September. The US Composite PMI is estimated to have grown at a steady pace of 54.6.
- In Monday’s session, investors will pay close attention to speeches from a slew of Federal Open Market Committee (FOMC) members, including newly appointed President Donald Trump’s candidate Stephen Miran, who voted for a 50-bps interest rate cut in the policy meeting last week.
Technical Analysis: Pound Sterling edges higher to near 1.3480
The Pound Sterling ticks up to near 1.3480 against the US Dollar on Monday. However, the near-term trend of the GBP/USD pair remains bearish as it trades below the 20-day Exponential Moving Average (EMA), which trades around 1.3524. The Cable trades near the lower end of a Rising Channel formation around 1.3470.
The 14-day Relative Strength Index (RSI) has fallen sharply below 50.00. A fresh bearish momentum would emerge if the RSI breaks below 40.00.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 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.
추천 기사
