Pound Sterling gains further against US Dollar amid federal government shutdown risks
- The Pound Sterling climbs to near 1.3445 against the US Dollar as the US government faces shutdown risks.
- BoE’s Dhingra supports quick interest rate cuts amid slowing UK job demand.
- Investors brace for high volatility in the US Dollar amid a data-packed week.
The Pound Sterling (GBP) extends its upside to near 1.3445 against the US Dollar (USD) during the European trading session on Monday. The GBP/USD pair strengthens as the US Dollar slides further, with investors remaining cautious as the deadline of the United States (US) government shutdown approaches.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls further to near 97.95. The DXY faced selling pressure on Thursday after failing to extend an over-a-week-long upside move above 98.60.
The Republican-controlled US Senate is struggling to get the short-term funding bill passed into the House, as Democrats have been demanding that any legislation undo recent Republican cuts to healthcare programs, Reuters reported. The Congress needs to get the bill passed before October to avert a government shutdown, a scenario that could lead to the closure of some institutions on Wednesday.
"If they [Democrats] don’t make a deal, the country closes,” US President Donald Trump said in a telephonic interview over the weekend, as per Reuters.
Daily digest market movers: Pound Sterling trades higher against its peers
- The Pound Sterling trades broadly higher against its major peers at the start of the week. The British currency gains even as Bank of England (BoE) Monetary Policy Committee (MPC) member Swati Dhingra has called for quick interest rate cuts amid growing concerns about the United Kingdom (UK) labour market, in a column published by The Times newspaper on Friday.
- "We can afford to cut rates further and not put additional strain on economic growth without threatening the inflation target,” Dhingra said,. She expressed confidence that the UK inflation risks in relation to the Eurozone would fade soon, and therefore, the central bank should be overly cautious on further interest rate cuts.
- Investors should note that Dhingra was one of two MPC members of the Bank of England who voted to hold interest rates steady at 4% in the monetary policy meeting announced in the middle of the ongoing month.
- UK’s job-search website Adzuna also reported earlier in the day that online jobs posted by employers dropped by 1.3% in the 12 months ending in August, the first decline seen since February. A slowdown in the UK job hiring trend could force BoE officials to shift to a dovish stance on the monetary policy outlook. Currently, traders expect the bank to hold interest rates at 4% again in the upcoming policy announcement in November.
- Going forward, investors will focus on the revised UK Q2 Gross Domestic Product (GDP) data, which will be released on Tuesday. Preliminary Q2 GDP report showed that the economy expanded by 0.3% on a quarterly basis.
- In the US, investors will closely monitor a string of US labour market and ISM Purchasing Managers’ Index (PMI) figures this week. The impact of the US job data will be significant on market speculation for the Federal Reserve’s (Fed) monetary policy outlook, as officials have become more concerned about deteriorating labor market conditions than price pressures remaining well above the central bank’s 2% target.
Technical Analysis: Pound Sterling rises to near 1.3445
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The Pound Sterling jumps to near 1.3445 against the US Dollar on Monday. The GBP/USD pair rebounded after revisiting the seven-week low around 1.3333 last week. However, the near-term outlook of the Cable remains bearish as it stays below the 20-day Exponential Moving Average (EMA), which trades around 1.3490.
The 14-day Relative Strength Index (RSI) rebounds from 40.00. The pair would remain sideways if the RSI stays inside the 40.00-60.00 range.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the September 17 high of 1.3726 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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