Pound Sterling weakens against US Dollar ahead of US Manufacturing PMI data
- The Pound Sterling slides to near 1.3480 against the US Dollar as the Greenback gains ahead of the US opening.
- Investors await the US ISM Manufacturing PMI data, which is expected to have declined again.
- The BoE is unlikely to cut interest rates in the monetary policy meeting this month.
The Pound Sterling (GBP) declines to near 1.3480 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD pair drops as the US Dollar gains ahead of the United States (US) opening after an extended weekend, due to Labor Day holiday on Monday, with investors awaiting the ISM and S&P Global Manufacturing Purchasing Managers’ Index (PMI) data for August due later in the North American session.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to near 98.00.
Economists expect the US ISM Manufacturing PMI to have contracted again, but at a moderate pace. The Manufacturing PMI is seen at 49.0, higher from the prior reading of 48.0. A figure below the 50.0 threshold is considered a contraction in the business activity.
Investors will also monitor other indices of PMI data, such as Prices Paid, and Employment to gauge the impact of US President Donald Trump's tariffs on inflation and the labor market.
Daily digest market movers: Pound Sterling trades calmly in a light UK economic calendar week
- The Pound Sterling trades broadly stable against its major peers in a light United Kingdom (UK) economic calendar week. Upbeat market mood due to firm expectations that the Federal Reserve (Fed) will reduce interest rates at the September meeting has continued to provide strength to the Pound Sterling.
- In the near term, the major trigger for the British currency will be market expectations about whether the Bank of England (BoE) will cut interest rates in the policy meeting this month.
- Last week, BoE Monetary Policy Committee (MPC) member Catherine Mann stated that interest rates should remain restrictive for a longer period until downside economic risks get materialized. Mann argued against loosening monetary conditions as inflation in the UK region is proving to be persistent.
- Going forward, a slew of US labor market-related data, JOLTS Job Openings for July, ADP Employment Change and the Nonfarm Payrolls (NFP) data for August, will influence the GBP/USD pair.
- Investors will closely monitor the US employment figures to get the current status of labor demand in the wake of tariffs imposed by Washington on its trading partners.
- Also, market expectations for the Fed to cut interest rates at the September meeting intensified after the release of the NFP report for July, which revealed a sharp downward revision in job numbers of May and June.
Technical Analysis: Pound Sterling declines below 1.3500
The Pound Sterling slides below 1.3500 against the US Dollar on Tuesday. The overall trend of the GBP/USD pair is broadly sideways as it stays close to the 20-day Exponential Moving Average (EMA), which trades around 1.3468.
The Cable is also forming an inverse Head and Shoulder (H&S) chart pattern on the daily chart, which leads to a bullish reversal after a corrective or downside move. The neckline of the H&S pattern is placed around 1.3580.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sharp volatility contraction.
Looking down, the August 11 low of 1.3400 will act as a key support zone. On the upside, the July 1 high near 1.3790 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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