Pound Sterling sees more upside on UK budget-relief rally, upwardly revised PMI
- The Pound Sterling aims to extend its upside further due to multiple tailwinds.
- UK S&P Global Composite PMI is revised higher to 51.2 in November.
- Investors expect both the Fed and the BoE to cut interest rates this month.
The Pound Sterling (GBP) strives to extend its recent rally against its major currency peers on Friday. The British currency has been outperforming its peers for over a week, prompted by the United Kingdom (UK) budget announced on November 26, and an upward revision in the S&P Global Purchasing Managers’ Index (PMI) data for November.
The budget announced by Chancellor of the Exchequer Rachel Reeves last week unveiled the Labour Party’s plans to raise 26 billion pounds in taxes to fill the fiscal hole without having a material burden on households.
Financial market participants were worried before the budget announcement that the government might go against its self-imposed fiscal rules to address welfare spending measures, a scenario that could have promoted UK gilt yields. However, the government passed the bond market test and also presented large-scale investment plans.
On Wednesday, the S&P Global reported that the Composite PMI rose to 51.2 against the preliminary reading of 50.5, which diminished fears of muted business activity.
Going forward, the major trigger for the Pound Sterling will be market expectations for the Bank of England’s (BoE) monetary policy outlook. The BoE is expected to cut interest rates in the next meeting on December 18 to support weakening job market conditions.
Daily digest market movers: Pound Sterling continues to outperform US Dollar
- The Pound Sterling trades 0.2% higher to near 1.3360 against the US Dollar (USD) during the European trading session on Friday. The GBP/USD pair gains as the US Dollar retreats to near its five-week low, with traders remaining confident that the Federal Reserve (Fed) will cut interest rates in its monetary policy meeting next week.
- During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls back to near the five-week low around 98.75.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December policy meeting is 87%.
- Firm Fed dovish expectations are backed by weakening US job market conditions. The US ADP reported on Wednesday that the private sector shed 32K jobs in November, while it was expected to add 5K fresh workers.
- The minutes of the Federal Open Market Committee (FOMC) meeting in October also showed that policymakers acknowledged downside labor market risks and the need to loosen monetary conditions further. However, several members argued against reducing interest rates in December.
- In Friday’s session, investors will focus on the US Personal Consumption Expenditure Price Index (PCE) data for September, which will be released later in the day. However, its impact might be insignificant on expectations towards the Fed's next step as it is delayed data.
Technical Analysis: GBP/USD aims to break above the 50% Fibonacci retracement near 1.3400
The Pound Sterling trades firmly near its monthly high of 1.3385 against the US Dollar, posted on Thursday. The pair holds above a rising 20-day Exponential Moving Average (EMA) at 1.3227, maintaining a positive near-term bias. The 20-day EMA has sloped higher in recent sessions, and dips remain shallow.
The 14-day Relative Strength Index (RSI) at 62.77 reflects bullish momentum.
Momentum remains supportive, while price stays above the rising 20-day EMA. A daily close above the 50% Fibonacci retracement at 1.3402 would reinforce the bullish tone and open room for continuation towards the October 17 high of 1.3471. Conversely, failure to breach that barrier would keep the pair consolidating, with pullbacks leaning toward the 38.2% Fibonacci area and trend support.
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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