Pound Sterling trades firmly ahead of EU-UK trade summit
- The Pound Sterling gains against its major peers on Monday ahead of a potential trade deal between the UK and the EU later in the day.
- Moody’s downgrade of the US Sovereign credit rating has battered the US Dollar.
- According to analysts, the Fed is unlikely to cut interest rates this year.
The Pound Sterling (GBP) trades higher against its major peers, except the Euro (EUR), at the start of the week. The British currency moves higher ahead of the European Union (EU)-United Kingdom (UK) trade summit in London on Monday. Investors will pay close attention to a potential trade deal as it will strengthen economic ties between the economies since the announcement of Brexit.
According to comments from the Head of Trade Policy at the British Chamber of Commerce, William Bain, in a Jefferies-hosted session over the weekend, the potential deal between the UK and the EU would benefit various British industries such as defence, agriculture, and energy. Bain stated that the non-binding defence pact will unlock business worth 150 billion Euros for UK arms suppliers. The deal between European economies also aims to remove non-tariff barriers across agricultural industries.
For the last week, the British currency has performed strongly on the back of an upbeat UK Gross Domestic Product (GDP) report. The data showed on Thursday that the economy expanded at a robust pace of 0.7% in the first quarter of the year.
This week, investors will pay attention to the UK Consumer Price Index (CPI) data for April to get fresh cues about the Bank of England’s (BoE) monetary policy outlook, which will be released on Wednesday. The data is expected to show that the core CPI – which excludes volatile components of food, energy, alcohol, and tobacco – is expected to have grown at a faster pace of 3.6%, compared to the prior release of 3.4%.
Daily digest market movers: Pound Sterling gains against US Dollar
- The Pound Sterling jumps to near 1.3370 against the US Dollar (USD) in Monday’s European session. The GBP/USD pair strengthens as the US Dollar faces selling pressure after Moody’s Rating downgraded the United States (US) Sovereign Credit Rating from Aaa to Aa1 on Friday in the wake of sustained fiscal deterioration. However, the agency clarified that a one-notch downgrade doesn’t indicate that its confidence in the US administrative and Federal Reserve’s (Fed) framework has diminished.
- The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, declines to near 100.40.
- The outlook of the Greenback has improved due to a positive response from US President Donald Trump in an interview with Fox News on Friday about visiting China for direct trade talks with Chinese President Xi Jinping. Trump’s affirmation to visit China fuels hopes for a potential trade deal between Washington and Beijing, a scenario that will further diminish the risks of global economic turmoil.
- Another reason behind improving the US Dollar’s outlook is the growing expectation that the Fed will not lower interest rates anytime soon, despite the White House lowering tariffs from what they announced at the start of April.
- A report from leading investment banking firm Morgan Stanley showed that the Fed is unlikely to reduce interest rates before March 2026. “De-escalation greatly reduces the risk of a hard stop in trade flows and, in turn, the risk of a near-term recession in the economy,” economists at Morgan Stanley said, but warned of “slower growth and sticky inflation as levies are still high”.
- According to the CME FedWatch tool, the Fed is expected to cut interest rates twice this year, starting from the September meeting.
- Meanwhile, one-year consumer inflation expectations have accelerated further due to the fallout of tariffs by US President Trump. The University of Michigan (UoM) showed on Friday that flash one-year Consumer Inflation Expectations have increased to 7.3% from the prior release of 6.5% - a key trigger that would refrain the Fed from lowering interest rates from their current levels.
Technical Analysis: Pound Sterling jumps to near 1.3370
The Pound Sterling climbs above 1.3370 against the US Dollar on Monday. The GBP/USD pair holds above the 20-day Exponential Moving Average (EMA), which trades around 1.3270, suggesting that the near-term trend is bullish.
The 14-day Relative Strength Index (RSI) points upwards inside the 40.00-60.00 range. A fresh bullish momentum would appear if the RSI breaks above 60.00.
On the upside, the three-year high of 1.3445 will be a key hurdle for the pair. Looking down, the psychological level of 1.3000 will act as a major support area.
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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