Pound Sterling consolidates against US Dollar as Senate advances stopgap bill
- The Pound Sterling trades in a tight range around 1.3150 against the US Dollar as market mood improves.
- The US federal reopening would improve households’ sentiment.
- Investors await UK employment for the three months ending September and Q3 preliminary GDP data.
The Pound Sterling (GBP) consolidates near 1.3150 against the US Dollar (USD) during the European trading session on Monday. The GBP/USD pair wobbles as the US Dollar (USD) steadies despite the vote favoring the United States (US) government reopening has been approved in the Senate.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 99.65.
Democrats agreed to support the approval of a stopgap bill with Republicans, which will fund certain government departments through January 30, in exchange for extending subsidies under the Affordable Care Act.
The scenario of US federal reopening would improve consumer sentiment, which has been hit badly in the past few weeks. On Friday, the preliminary Michigan Consumer Sentiment Index came in at 50.3 in November, the lowest figure in three and a half years.
Daily digest market movers: Pound Sterling weakens as BoE dovish bets accelerate
- The Pound Sterling trades lower against its major currency peers at the start of the week. The British currency faces selling pressure amid growing expectations that the Bank of England (BoE) will cut interest rates at its December policy meeting.
- Analysts at Morgan Stanley, Citigroup, and UBS Global Research have shifted their stance towards the December policy meeting and expect the BoE to cut interest rates by 25 basis points (bps) to 3.75%.
- BoE dovish expectations have been prompted due to a change in the central bank’s language on the monetary policy guidance. The central bank eliminated “careful” from its guidance of “gradual downward monetary policy path” in the monetary policy announcement on Thursday, which it stressed in the September policy meeting.
- In the last week’s monetary policy announcement, the BoE held its interest rates steady at 4%, with 5-4 majority.
- This week, the major trigger for the Pound Sterling will be the United Kingdom (UK) labour market data for the three months ending September, and preliminary Q3 Gross Domestic Product (GDP), which will be released on Tuesday and Thursday, respectively.
- Economists expect the ILO Unemployment Rate to have accelerated to 4.9% from the prior release of 4.8%. Signs of weakening job market conditions would further prompt BoE dovish expectations.
Technical Analysis: Pound Sterling trades flat around 1.3150
The Pound Sterling flattens around 1.3150 against the US Dollar on Monday, holding above an over six-month low around 1.3000 posted on Tuesday. The overall trend of the pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3268.
The 14-day Relative Strength Index (RSI) recovers to near 40.00. A fresh bearish momentum would emerge if the RSI resumes its downside journey.
Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 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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