Pound Sterling outperforms on risk-on market sentiment
- The Pound Sterling trades higher against its major currency peers amid an upbeat market mood.
- US President Trump expresses confidence in the trade deal with China.
- The Federal Reserve is expected to cut interest rates on Wednesday.
The Pound Sterling (GBP) trades higher against its major currency peers, except second-level safe-haven ones, on Tuesday. The British currency gains as global market sentiment has improved due to growing expectations that the United States (US) and China will reach a trade deal soon.
On Monday, US President Donald Trump expressed confidence that a deal would be announced after his meeting with Chinese leader Xi Jinping later this week in South Korea.
“I've got a lot of respect for President Xi and I think we're going to come away with a deal,” Trump said to reporters at Air Force One while traveling to Tokyo. Trump also expressed the possibility that he would visit China in early 2026.
Additionally, the optimism on the US-China trade deal was also prompted by comments from US Treasury Secretary Scott Bessent signaling that Washington will not proceed with 100% additional tariffs announced on Beijing. Bessent also expressed confidence that China will defer rare earth export controls, which propelled trade frictions between the world’s two largest economies.
On the domestic front, hopes of the Bank of England (BoE) easing monetary conditions have increased as United Kingdom (UK) retailers have cut their prices in October. The British Retail Consortium (BRC) showed earlier in the day that overall shop prices dropped by 0.3% monthly from September, the first decline seen since March. Accelerating BoE rate cut expectations could weigh on the Pound Sterling in the near term.
Daily digest market movers: Fed dovish bets weigh on US Dollar
- The Pound Sterling extends its recovery move to near 1.3360 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD pair gains as the US Dollar declines amid firm expectations that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement on Wednesday.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.2% lower, near the weekly low of 98.60.
- Signs of moderate US inflation growth, weak job demand, and the ongoing federal shutdown are major reasons behind intensified Fed dovish expectations. The US Consumer Price Index (CPI) report for September showed on Friday that price pressures grew moderately on a monthly basis.
- Latest commentaries from a majority of Federal Open Market Committee (FOMC) members, including Chairman Jerome Powell, have warned about deteriorating US labor market conditions.
- “Downside risks to the US job market have risen, which also justified the September interest rate cut,” Powell said in a speech at the National Association for Business Economics (NABE) conference in the mid of this month.
- Meanwhile, the ongoing US government shutdown, which is entering its fourth week, has raised concerns over the economic outlook.
- Apart from the Fed’s interest rate decision, investors will also focus on cues regarding the monetary policy outlook for the remainder of the year. The Fed’s dot plot released at the September policy meeting showed that policymakers collectively see Federal Fund rates heading to 3.6% by the year-end, suggesting that the US central bank will cut rates again in December's meeting.
Technical Analysis: Pound Sterling wobbles around 200-day EMA
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The Pound Sterling recovers further against the US Dollar to near 1.3360 on Tuesday. The overall trend of the GBP/USD pair is uncertain as it wobbles near the 200-day Exponential Moving Average (EMA), which trades around 1.3300.
The 14-day Relative Strength Index (RSI) wobbles near 40.00. A fresh bearish momentum would emerge if the RSI drops below that level.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 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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