Pound Sterling extends losses against US Dollar as trade concerns ease
- The Pound Sterling retraces further to near 1.3460 against the US Dollar as the Greenback recovers amid optimism on the EU-US trade front.
- The improvement in US-China trade relations has boosted US Consumer Confidence.
- Markets don’t expect the BoE to cut interest rates in June.
The Pound Sterling (GBP) extends its correction to near 1.3460 against the US Dollar (USD) during European trading hours on Wednesday. The GBP/USD pair retreats for a second consecutive day after refreshing a three-year high at around 1.3600 on Monday as the US Dollar (USD) gains ground on hopes that the United States (US) and the European Union (EU) will reach a trade deal soon.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to near 99.80, extending Tuesday’s recovery move.
On Tuesday, US President Donald Trump expressed confidence in a post on Truth.Social that the EU is increasing efforts to reach a bilateral trade deal. "I was extremely satisfied with the 50% Tariff allotment on the European Union, especially since they were ‘slow walking’. I have just been informed that the EU has called to quickly establish meeting dates. This is a positive event, and I hope that they will," Trump wrote.
Increasing optimism over the US-EU trade deal has helped the US Dollar claw back almost the losses seen on Friday, when US President Trump threatened to impose a flat 50% tariff on imports from the EU.
Another reason behind the recent strength in the US Dollar is the upbeat US Consumer Confidence data for May. The data, released on Tuesday, showed that Consumer Confidence increased substantially to 98.0 after deteriorating for five consecutive months. The commentary from the Conference Board showed that de-escalation in US-China trade tensions contributed significantly to lifting households’ mood.
Daily digest market movers: Pound Sterling takes a breather after a strong run-up
- The Pound Sterling underperforms its peers during European trading hours on Wednesday. The British currency takes a breather after a sharp rally in the past few trading days as investors look for fresh cues about whether the Bank of England (BoE) will cut interest rates again at its June policy meeting.
- The BoE reduced its borrowing rates by 25 basis points (bps) to 4.25% earlier this month, with a 7-2 vote split, and guided a “gradual and cautious” interest rate cut approach.
- The latest strong United Kingdom (UK) Consumer Price Index (CPI) and Retail Sales data for April, along with the upbeat Q1 Gross Domestic Product (GDP) figures, are sufficient to discourage BoE officials from cutting interest rates further.
- This month, the UK service inflation data, closely tracked by BoE policymakers, accelerated sharply to 5.4% year-over-year from 4.7% in March. Month-on-month, Retail Sales rose at a robust pace of 1.2%, compared to the 0.1% seen in March. UK economic growth came in at 0.7%, significantly higher than the 0.1% recorded in the last quarter of 2024.
- The International Monetary Fund (IMF) has raised the UK GDP growth forecast for the current year to 1.2%, slightly higher than 1.1% anticipated earlier, on the back of an upbeat economic performance in the January-March period.
- This week, investors will focus on the Personal Consumption Expenditure Price Index (PCE) data for April, which will be released on Friday. The inflation data is unlikely to influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook as officials are expected to remain on hold until they get clarity on new economic policies under Trump’s leadership and the scope of their consequences on the economy.
Technical Analysis: Pound Sterling falls to near 1.3460
The Pound Sterling retraces to near 1.3460 against the US Dollar from the three-year high around 1.3600 on Monday. Despite the recent decline, the outlook of the pair remains firm as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3380.
The 14-day Relative Strength Index (RSI) holds above 60.00, suggesting that the bullish momentum is intact.
On the upside, the January 2022 high of 1.3750 will be a key hurdle for the pair. Looking down, the 20-day EMA 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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