Pound Sterling recovers sharply as Fed large rate cut bets swell
- The Pound Sterling climbs to near 1.3150 against the US Dollar as traders raise bets for a Fed 50 bps interest rate cut for next week's meeting.
- Slowed US annual PPI for August prompted the Fed’s sizable rate cut prospects.
- Investors expect that the BoE is unlikely to cut interest rates next week.
The Pound Sterling (GBP) extends its recovery to nearly 1.3150 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair gains as the US Dollar (USD) falls sharply after the United States (US) Producer Price Index (PPI) data for August prompted market expectations for the Federal Reserve (Fed) to begin reducing interest rates next week aggressively.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides further to near 101.00.
The PPI report showed that the annual headline producer inflation rose by 1.7%, slower than the estimates of 1.8% and July’s print of 2.1%. In the same period, the core PPI – which excludes volatile food and energy prices – grew steadily by 2.4%. Investors expected the core PPI to have accelerated to 2.5%. Meanwhile, the monthly headline and core PPI rose at a faster pace of 0.2% and 0.3%, respectively.
According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has increased sharply to 43% from the 14% before the US PPI data release.
In Friday’s session, investors will focus on the preliminary Michigan Consumer Sentiment Index data for September. The sentiment data is estimated to have remained almost steady at 68.0 from the prior release of 67.9.
Daily digest market movers: Pound Sterling outperforms US Dollar
- The Pound Sterling exhibits a strong performance against its major peers on Friday. The British currency strengthens on multiple tailwinds. Growing speculation for the Fed to reduce interest rates aggressively has improved market sentiment. In addition, firm expectations for the Bank of England (BoE) to follow a shallow policy-easing cycle have also strengthened the Pound Sterling.
- Historically, the scenario of the Fed pivoting to policy-normalization aggressively improves the appeal of risky assets. S&P 500 futures have posted nominal gains in the Asian session after a bullish Thursday, suggesting an improvement in investors’ risk appetite.
- According to a Reuters poll, the BoE is unlikely to cut interest rates in its next policy meeting, scheduled for next week. All 65 economists in a Reuters poll said the BoE would likely hold rates at 5.0% on Thursday after cutting from a 16-year high of 5.25% in August.
- Meanwhile, the next major trigger for the Pound Sterling will be the United Kingdom (UK) Consumer Price Index (CPI) data for August, which will be published on Wednesday. The latest BoE forecast showed that the UK annual headline inflation will remain above 2% by the year-end.
Technical Analysis: Pound Sterling bounces back from 1.3000
The Pound Sterling recovers sharply to near 1.3150 against the US Dollar. The GBP/USD pair bounced back strongly after discovering strong buying interest near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp upside move after a breakout on August 21. Also, the 20-day Exponential Moving Average (EMA) near 1.3080 has acted as major support for the Pound Sterling’s appeal.
The 14-day Relative Strength Index (RSI) remains inside the 40.00-60.00 range. A fresh bullish impulse would occur if the momentum oscillator breaks above 60.00.
Looking up, the Cable will face resistance near the round-level resistance of 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support for the Pound Sterling bulls.
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, aka ‘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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