Pound Sterling weakens as Warsh nomination for Fed Chair spooks market mood
- The Pound Sterling has come under pressure amid a risk-off market mood.
- Trump's nomination of Kevin Warsh as the new Fed chairman has improved the US Dollar’s appeal.
- Investors await the BoE’s monetary policy announcement and the US NFP data.
The Pound Sterling (GBP) trades lower against safe-haven currencies, but outperforming risky peers, at the start of the week. The British currency is under severe pressure against the US Dollar (USD), trading vulnerably below 1.3700 during the European session on Monday, as the latter gained after US President Donald Trump nominated Kevin Warsh as the new Federal Reserve (Fed) chairman.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near its previous week's high of 97.33.
Kevin Warsh’s selection as the successor to current Fed Chair Jerome Powell has resulted in a sharp improvement in the US Dollar’s appeal, given his historic preference for a strong Greenback while he was serving as a Fed governor. Market experts believe that interest rate cuts in Warsh’s tenure would be slower than those of other candidates in the race had they been elected. Also, he was known for opposing Quantitative Easing (QE) in the Fed’s balance sheet under Ben Bernanke’s chairmanship.
A strong recovery in the US Dollar has resulted in a sharp decline in the demand for precious metals and risk-sensitive assets.
Meanwhile, dovish Fed expectations for April’s monetary policy meeting have marginally ticked up after Warsh’s nomination, according to the CME FedWatch tool.
Daily Digest Market Movers: The BoE is expected to hold interest rates steady at 3.75%
- The Pound Sterling is likely to trade with caution as the Bank of England (BoE) is scheduled to announce its first monetary policy of the year on Thursday. The BoE is expected to hold interest rates steady at 3.75% this week after slashing them by 25 basis points (bps) in the December policy meeting.
- On Thursday, investors will also focus on the release of the BoE monetary policy report to get fresh cues on the current state of the economy. The United Kingdom (UK) central bank is expected to reiterate that the monetary policy will remain on a “gradual downward path” amid weak job market conditions.
- Recent UK labor market data for three months ending November showed that the Unemployment Rate remained steady at 5.1%.
- This week, the GBP/USD pair will also be influenced by a string of US employment-related and Purchasing Managers’ Index (PMI) data. The major highlight will be the Nonfarm Payrolls (NFP) figures for January, which will be released on Friday. Investors will pay close attention to the US NFP to get fresh cues on the Fed’s monetary policy outlook.
- In Monday’s session, investors will focus on the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for January, which will be published at 15:00 GMT, which is seen higher at 48.3 from 47.9 in December. Though the manufacturing sector activity appears to have slightly improved, it continued to decline. A figure below 50.0 is considered a contraction in the business activity.
Technical Analysis: GBP/USD holds key 20-day EMA
The Pound Sterling trades with caution below 1.3700 against the US Dollar as of writing. The GBP/USD pair has come under pressure after failing above the key resistance of 1.3785 last week. The price still holds above the 20-day Exponential Moving Average (EMA), signifying a strong upside trend remains intact.
The 14-day Relative Strength Index (RSI) cools down to near 60.00 from overbought levels of 80.00, in what seems a steady advance, hinting at a possible return of bulls.
On the upside, the January high of 1.3869 will remain a key barrier for the bulls. Looking down, the 20-day EMA will act as major support zone.
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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