Pound Sterling trades with caution against US Dollar ahead of key US economic data release
- The Pound Sterling struggles around 1.3450 against the US Dollar ahead of US Q2 GDP, Initial Jobless Claims and Durable Goods Orders data.
- Officials from both the Fed and the BoE have warned of upside inflation risks.
- BoE Greene expects that trade war risk has abated.
The Pound Sterling (GBP) trades cautiously around 1.3450 against the US Dollar (USD) during the European trading session on Thursday. The GBP/USD pair struggles to gain ground as the US Dollar demonstrates strength ahead of key United States (US) economic data releases at 12:30 GMT.
At the time of press, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near an almost two-week high of around 97.80 posted on Wednesday.
Investors will pay close attention to the US Initial Jobless Claims data for the week ending September 20 to get fresh cues on the current status of the labor market. Lately, comments from Federal Reserve (Fed) officials have signaled that they are more concerned about deteriorating job market than inflationary pressures remaining well above the central bank’s target of 2%.
The US Department of Labour is expected to show that the number of individuals seeking jobless benefits for the first time rose to 235K from the prior reading of 231K. Fed dovish expectations intensified significantly in the second week of the month after Initial Jobless Claims jumped to 264K for the week ending September 6, the highest seen in four years.
In Thursday’s session, investors will also focus on Durable Goods Orders data for August. Fresh orders for durable goods are estimated to have declined at a moderate pace of 0.5%. In July, Durable Goods Orders contracted by 2.8%.
Other notable releases in the US economic calendar will be the final reading of the Q2 Gross Domestic Product (GDP) and the Personal Consumption Expenditure Price Index (PCE) data.
Daily digest market movers: Pound Sterling trades calmly against its peers
- The Pound Sterling trades broadly stable against its major peers on Thursday, with investors seeking fresh cues on whether the Bank of England (BoE) will cut interest rates in the remainder of the year.
- On Wednesday, BoE Monetary Policy Committee (MPC) member Megan Greene advised caution on further interest rate cuts as risks to inflation have shifted to the upside. Greene was one of the MPC members who supported holding interest rates steady in the monetary policy meetings in September and August. Last week, the BoE held interest rates steady but reduced them by 25 basis points (bps) to 4% at the August policy meeting.
- Regarding the United Kingdom (UK) economic outlook, Greene said that “trade risks have abated”, and that the central bank expect growth to “rebound”, which won’t lead to labor market risks materializing, Mace News reported. She added, “Firms suggest that much of the adjustment from higher insurance and minimum wage costs has already occurred.”
- In last week’s policy meeting, BoE Governor Andrew Bailey retained a “gradual and careful” monetary easing approach.
- Meanwhile, the US Dollar has been performing strongly as a few Federal Open Market Committee (FOMC) officials, including Chair Jerome Powell, have advised that the US central bank should exercise caution on further monetary policy expansion, citing upside inflation risks. However, none of the FOMC members have argued against further reducing interest rates.
- On Wednesday, San Francisco Federal Reserve Bank President Mary Daly also supported more interest rate cuts to support the slowing labor market. “Further policy adjustments likely will be needed, as the Fed works to restore price stability and provide needed support to the labor market,” Daly said.
Technical Analysis: Pound Sterling struggles around 1.3450
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The Pound Sterling seems vulnerable near 1.3450 against the US Dollar on Thursday. The GBP/USD pair trades near the lower end of a Rising Channel formation around 1.3470. The near-term trend of the GBP/USD pair remains bearish as the 20-day Exponential Moving Average (EMA) continues to act as a key barrier around 1.3514.
The 14-day Relative Strength Index (RSI) has fallen sharply below 50.00. A fresh bearish momentum would emerge if the RSI breaks below 40.00.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 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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