Pound Sterling refreshes weekly high against weakened US Dollar amid government shutdown
- The Pound Sterling jumps to near 1.3480 against the US Dollar as the Greenback weakens after the government shutdown.
- BoE’s Breeden warns of economic risks and advocates interest rate cuts.
- US private employers are expected to have added 50K fresh workers in September.
The Pound Sterling (GBP) posts a fresh weekly high near 1.3480 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair edges higher as the US Dollar underperforms its peers, with the United States (US) government entering a shutdown.
At the time of press, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.25% lower on the day to near 97.50.
Washington entered the dark after government funding expired at midnight on Tuesday as Republicans failed to persuade Democrats to support the short-term funding bill in the House and Senate, which was expected to extend the shutdown deadline to November 21.
The impact of the federal government closure will be significant on market expectations for the Federal Reserve’s (Fed) monetary policy outlook as statistical agencies warned of a halt in key economic releases, including the official employment report for September, which is yet scheduled for Friday.
In response, US President Donald Trump has warned of irreversible cuts in programs favoured by Democrats for letting the government enter a shutdown. “They’re taking a risk by having a shutdown. We can do things during the shutdown that are irreversible, that are bad for them,” Trump said, Time Magazine reported.
Daily digest market movers: Pound Sterling trades mixed against its peers
- The Pound Sterling exhibits a mixed performance against its major peers on Wednesday. The British currency is expected to struggle to find a direction as Bank of England (BoE) officials are divided over the United Kingdom (UK) inflation outlook.
- On Tuesday, BoE Deputy Governor Clare Lombardelli warned that officials should not consider inflation shocks as temporary. Lombardelli stated that an increase in inflation could be from a one-off event, but its impact could prove to be more persistent, Reuters reported. It is worth noting that Lombardelli was one of the Monetary Policy Committee (MPC) members who voted to hold interest rates steady in both policy meetings in August and September. In August, the BoE reduced key borrowing rates by 25 basis points (bps) to 4%.
- Separately, BoE member Catherine Mann also stated that price pressures could prove to be persistent, but she didn’t rule out the possibility of further interest rate cuts.
- On the contrary, BoE Deputy Governor Sarah Breeden argued in favour of reducing interest rates, citing that higher interest rates for longer could harm economic prospects and push inflationary pressures below the central bank’s target of 2%. “Risks in holding policy too tight for too long, could pull inflation below target,” Breeden said.
- In Wednesday’s session, the GBP/USD pair will be influenced by the ADP Employment Change data for September, which will be published at 12:15 GMT. The impact of the ADP report will be significant on the Fed’s monetary policy outlook amid uncertainty over the release of the US official labor market data later in the week. Economists expect the US private sector to have added fresh 50K new workers, marginally lower than 54K in August.
Technical Analysis: Pound Sterling extends winning streak
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The Pound Sterling extends its winning streak against the US Dollar for the fourth trading day on Wednesday. The GBP/USD pair recovers to near the 20-day Exponential Moving Average (EMA), which trades around 1.3480.
The 14-day Relative Strength Index (RSI) rebounds from 40.00. The pair is likely to remain sideways as 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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