Pound Sterling performs strongly even as BoE dovish bets remain firm
- The Pound Sterling shows strength ahead of key central bank decisions this week.
- The BoE is set to lower rates on Thursday, with market participants expecting the central bank to guide an acceleration in policy-easing and lower GDP growth prospects.
- The Fed is almost certain to keep interest rates steady on Wednesday.
The Pound Sterling (GBP) trades firmly against its major peers, except the Japanese Yen (JPY), on Tuesday. The British currency gains ahead of the Bank of England (BoE) interest rate decision, which will be announced on Thursday, and in which the central bank is expected to cut interest rates by 25 basis points (bps) to 4.25%. This would be the fourth interest rate cut by the BoE in its current monetary policy expansion cycle, which started in August.
Investors will pay close attention to the BoE’s guidance on the monetary policy and the economic outlook in the face of higher tariffs imposed by US President Donald Trump on the so-called “Liberation Day” on April 2. In the March policy meeting, the BoE guided a gradual interest rate cut approach. However, BoE officials had not discounted trade war risk then, which Governor Andrew Bailey stressed to do so in late April.
Market participants have forecasted that the BoE could roll back its “gradual policy easing” stance and lower growth forecasts. "We anticipate the BoE will downgrade its Gross Domestic Product (GDP) forecasts due to the trade war, and there is a risk the BoE may remove the reference to a ’gradual’ cutting cycle," analysts at Commonwealth Bank of Australia said.
Daily digest market movers: Pound Sterling outperforms US Dollar
- The Pound Sterling jumps to near 1.3330 against the US Dollar (USD) during European trading hours on Tuesday. The GBP/USD pair strengthens as the US Dollar declines, while investors await the monetary policy decision from the Federal Reserve (Fed), which will be announced on Wednesday.
- According to the CME FedWatch tool, the Fed is almost certain to keep borrowing rates steady in the range of 4.25%-4.50%. This would be the third straight policy meeting in which the central bank would leave interest rates unchanged. Traders have remained increasingly confident about the Fed maintaining a status quo on Wednesday as officials have been arguing in favor of maintaining a “wait and see” approach due to a lack of clarity on the economic outlook under the leadership of US President Trump.
- Market experts have warned that US President Trump's rollout of new economic policies will be negative for the economy, assuming that higher tariffs could lead to slower economic growth and a resurgence in consumer inflation. “At the heart of the issue is the risk of stagflation, triggered by trade-related cost increases and supply chain disruptions,” according to a Wall Street Journal (WSJ) report by Nick Timiraos.
- On the contrary, US Treasury Secretary Scott Bessent has expressed confidence that the tariff policy will favor economic growth and help reduce the trade deficit. “We think we can get growth back to 3% by this time next year that will help bringing down the federal deficit by maybe 1% per year,” Bessent said in an interview with CNBC Television on Monday.
- US Treasury Secretary Bessent has also assured confidence that Washington can close several trade deals this week. “I am highly confident that 17 trading partners, excluding China, have presented very good trade proposals, and we (White House) are very close to some deals on trade, maybe as early as this week,” Bessent said. On the current status of the US-China trade outlook, Bessent said that we could see “substantial progress on trade with China in the coming weeks”.
Technical Analysis: Pound Sterling climbs above 1.3300
The Pound Sterling jumps above 1.3300 against the US Dollar on Tuesday. The pair strives to revisit the three-year high of 1.3445. The overall outlook remains bullish as all short-to-long Exponential Moving Averages (EMAs) are sloping higher.
The 14-day Relative Strength Index (RSI) struggles to return above 60.00. A fresh bullish momentum would trigger if the RSI manages to do so.
On the upside, the three-year high of 1.3445 will be a key hurdle for the pair. Looking down, the April 3 high around 1.3200 will act as a major support area.
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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