Pound Sterling extends correction against US Dollar ahead of US Manufacturing PMI
- The Pound Sterling slides below 1.3300 against the US Dollar as the latter extends its recovery despite US Q1 GDP data showing an economic contraction.
- US-China trade uncertainty will likely keep investors on their toes as the US Manufacturing PMI could hint at early impact from Trump’s tariff policy.
- BoE officials stress the need to discount trade war risk in monetary policy decisions.
The Pound Sterling (GBP) corrects further, trading slightly below 1.3300 against the US Dollar (USD) during European trading hours on Thursday and extending the decline from its three-year high of 1.3445 posted on Tuesday. The GBP/USD pair faces selling pressure as the US Dollar (USD) extends its two-day recovery, a move that suggests that fears of global disruption due to the imposition of additional tariffs by United States (US) President Donald Trump have peaked.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, revisits the fortnightly high around 100.00.
The White House has signaled that it could announce bilateral trade deals with a number of trading partners in weeks. “Initial trade deals are to be announced in weeks, not months,” US Trade Representative Jamieson Greer said at Fox News, Reuters reported. However, he denied any trade discussion with China, which is still a concern for market participants, given the reliance of US industries on imports from the Asian giant.
The release of US Q1 Gross Domestic Product (GDP) data on Wednesday has also supported the US Dollar. The data showed that the US economy shrank in the first quarter of the year by an annualized rate of 0.3%, mainly due to a substantial increase in imports. US importers frontloaded inputs from their foreign suppliers to escape the burden of higher tariffs imposed by US President Trump on April 2.
In Thursday’s session, investors will focus on the final S&P Global and ISM Manufacturing Purchasing Managers’ Index (PMI) data for April. Investors will pay close attention to the ISM Manufacturing Prices Paid to know whether the impact of Trump’s protectionist policies has started feeding into input costs.
Last week, the preliminary S&P Global PMI report already said that tariffs are causing companies to “hike their selling prices at a pace not seen for over a year”. The agency warned that these higher prices will “inevitably feed through to higher consumer inflation, potentially limiting the scope for the Federal Reserve (Fed) to reduce interest rates at a time when a slowing economy looks in need of a boost”.
Daily digest market movers: Pound Sterling underperforms its peers
- The Pound Sterling slumps against its major peers, except the Japanese Yen (JPY), on Thursday in the European session. The British currency declines amid fears that the global trade war will hurt the United Kingdom’s (UK) economic outlook.
- There is a great chance that the UK will have a trade deal with Washington, and the impact of reciprocal tariffs by Donald Trump will be insignificant, given that the additional duty is 10%, the lowest among US trading partners. However, the major threat for the UK will be intense competition with other nations, assuming that Trump’s protectionist policies will force his trading partners to sell their products in other territories at lower prices.
- Bank of England (BoE) officials, including Governor Andrew Bailey, have warned that the central bank should consider global trade war risk in the fallout of Trump’s tariffs. "We do have to take very seriously the risk to growth,” Bailey said last week. Separately, BoE Deputy Governor Clare Lombardelli expressed concerns over trade policy uncertainty and stressed that it is “prudent” to consider “persistent risks” while making monetary policy decisions, Bloomberg reports.
- Increasing global economic uncertainty has forced traders to raise bets supporting the BoE to cut interest rates in the policy meeting on May 8. The BoE is almost certain to reduce borrowing rates by 25 basis points (bps) to 4.25%.
Technical Analysis: Pound Sterling falls to near 1.3300
The Pound Sterling retraces to near 1.3300 against the US Dollar from the three-year high of 1.3445. However, the overall outlook of the pair remains bullish as all short-to-long Exponential Moving Averages (EMAs) are sloping higher.
The 14-day Relative Strength Index (RSI) falls inside the 40.00-60.00 range, indicating that the bullish momentum is over for now. However, the upside bias still prevails.
On the upside, the round level of 1.3600 will be a key hurdle for the pair. Looking down, the April 3 high around 1.3200 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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