Pound Sterling ticks up despite firm BoE dovish bets
- The Pound Sterling edges up against its major currency peers, despite the UK economic outlook remaining uncertain.
- BoE dovish bets accelerate after soft UK inflation data.
- FOMC Minutes showed that officials are worried about upside inflation risks.
The Pound Sterling (GBP) ticks higher against its major currency peers, except antipodeans, on Thursday. The British currency strives to gain ground after an intense sell-off on Wednesday, which was prompted by intensified speculation of an interest rate cut by the Bank of England (BoE) in its next monetary policy meeting in December.
BoE dovish expectations accelerated after the release of the United Kingdom (UK) Consumer Price Index (CPI) report for October, which showed that price pressures cooled down at an expected pace. According to interest rate futures, the probability of the BoE cutting interest rates by 25 basis points (bps) to 3.75% in the December meeting has increased to 85% from 80% registered before the data release.
This month, BoE dovish expectations also accelerated after the release of the UK labor market figures for the three months ending September, which showed that the Unemployment Rate rose to 5%, the highest level seen since early 2021.
Going forward, the UK Retail Sales data for October and the flash S&P Global Purchasing Managers’ Index (PMI) data for November, will be published on Friday.
On the fiscal front, investors expect UK Chancellor of the Exchequer Rachel Reeves to extend the income tax threshold freeze in the upcoming Autumn Budget announcement on November 26. The odds of the Labour Party extending income taxes increased after Prime Minister Keir Starmer didn’t rule out the possibility while speaking to reporters at the House of Commons on Wednesday.
"The budget is one week today and we will lay out our plans," said Starmer when asked to confirm whether income tax thresholds would be frozen again, Reuters reported.
Daily digest market movers: Hawkish FOMC minutes strengthen US Dollar
- The Pound Sterling trades cautiously near its two-week low around 1.3030 against the US Dollar (USD) during the European trading session on Thursday. The GBP/USD pair is broadly under pressure as the US Dollar (USD) trades firmly amid fading expectations that the Federal Reserve (Fed) will cut interest rates again this year.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near an over five-month high around 100.30.
- The CME FedWatch tool shows that the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has diminished to 32.8% from 50.1% seen on Tuesday.
- Fed dovish expectations have squeezed after Wednesday's release of the Federal Open Market Committee (FOMC) minutes of the October monetary policy meeting, which showed that a majority of officials argued against reducing interest rates in December after cutting them by 25 bps to 3.75%-4.00% due to weak labor market conditions. Officials warned that further monetary policy expansion could prompt inflationary pressures.
- “Most participants noted further rate cuts could add to the risk of higher inflation becoming entrenched or could be misinterpreted as a lack of commitment to the 2% inflation objective,” FOMC minutes showed.
- On the economic data front, investors will focus on the US Nonfarm Payrolls (NFP) data for September, which will be published at 13:30 GMT. Investors will closely monitor official employment numbers to get cues about the current status of the labour market.
- The US NFP report is expected to show that the economy added 50K fresh workers, higher than the 22K registered in August. The Unemployment Rate is seen unchanged at 4.3%. Average Hourly Earnings, a key measure of wage growth, is expected to have grown steadily by 0.3% and 3.7% on a monthly and annual basis, respectively.
- Signs of further weakness in the US job market would boost Fed dovish bets for the December meeting, while upbeat numbers would be a drag for them.
Technical Analysis: Pound Sterling trades close to two-week low around 1.3030
The Pound Sterling struggles near its two-week low around 1.3030 against the US Dollar on Thursday. The overall trend of the GBP/USD pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3270. The Cable resumed its downside journey after facing selling pressure near the August low around 1.3140, which used to be a key support zone.
The 14-day Relative Strength Index (RSI) returns below 40.00, indicating a fresh bearish momentum ahead.
Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 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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