Pound Sterling extends gains against US Dollar on US government shutdown risks
- The Pound Sterling rises to near 1.3450 against the US Dollar amid risks of a likely US government shutdown.
- US Democrats want Republicans to undo cuts in the healthcare budget.
- BoE’s Ramsden argues in favor of interest rate cuts to support weakening job demand.
The Pound Sterling (GBP) extends its upside to near 1.3450 against the US Dollar (USD) during the European trading session Tuesday. The GBP/USD pair advances as the US Dollar trades cautiously amid fears of a potential United States (US) government shutdown, with Republicans struggling to persuade Democrats to support short-term funding bill before Tuesday’s midnight deadline.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally lower around 97.80.
Prospects of a partial US government shutdown have escalated significantly, following comments from Vice President (VP) JD Vance to CNBC, after meeting with Democrats, recognising that the administration could face a shutdown. “I think we’re headed to a shutdown because the Democrats won’t do the right thing,” Vance said.
Democrats have been denying approving the stopgap bill in the House of Senate as they want White House to roll back cuts in healthcare benefits announced earlier this year.
Meanwhile, the US Labour and Commerce departments have warned that the closure of statistical agencies, in the event of a partial shutdown, could halt the scheduled releases of key economic indicators, including official employment data for September.
Daily digest market movers: Pound Sterling trades lower against its major peers
- The Pound Sterling underperforms its major peers, except North American currencies, on Tuesday. The British currency weakens as Bank of England (BoE) Deputy Governor Dave Ramsden has argued in favor of reducing interest rates amid growing United Kingdom (UK) labor market concerns. Ramsden is also confident that inflationary pressures will return to the central bank as interest rates are still restrictive.
- “We have seen the labour market continuing to loosen with wage growth normalising,” Ramsden said in a panel discussion organised by the European Central Bank (ECB) in Frankfurt on Monday, and added that "I [Ramsden] see that as supporting a continuation of the core disinflation process, which anchors his view on the inflation outlook," Reuters reported.
- BoE Ramsden’s support for interest rate cuts is unfavorable for the Pound Sterling, as he was among seven of nine Monetary Policy Committee (MPC) members who voted to hold policy rates steady at 4% in the September policy meeting.
- Meanwhile, UK Q2 Gross Domestic Product (GDP) data has come in stronger than previously estimated on an annual basis. The figures showed that the economy rose by 1.4% YoY, faster than the preliminary release of 1.2%. Quarter-on-quarter GDP growth remained in line with flash estimates of 0.3%.
- In Tuesday’s session, the major trigger for the GBP/USD pair will be the US JOLTS Job Openings data for August, which will be published at 14:00 GMT. US employers are expected to have posted fresh 7.1 million jobs, in line with the prior reading of 7.18 million.
Technical Analysis: Pound Sterling gains to near 1.3450
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The Pound Sterling gains marginally higher to near 1.3450 against the US Dollar on Tuesday. However, the near-term outlook for the Cable remains bearish as it stays below the 20-day Exponential Moving Average (EMA), which trades around 1.3483.
The 14-day Relative Strength Index (RSI) rebounds from 40.00, currently at 46. The pair would remain sideways if the RSI is stable in 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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