Pound Sterling gains at the start of the week ahead of Fed-BoE monetary policy decisions
- The Pound Sterling surges to near 1.3160 against the US Dollar amid upbeat market sentiment.
- Investors expect the BoE to leave interest rates unchanged at 5% on Thursday.
- Traders remain divided over the size of the Fed’s likely interest-rate cut.
The Pound Sterling (GBP) performs strongly against its major peers at the start of the week, supported by the improved appeal for risk-perceived currencies and a weakening US Dollar, which is pressured by growing prospects that the Federal Reserve (Fed) will opt for a large interest-rate cut on Wednesday.
Firm Fed rate cut prospects have weighed on the US Dollar (USD), with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posting a fresh weekly low near 100.80.
On the United Kingdom (UK) front, the Pound Sterling will be guided by the Consumer Price Index (CPI) data for August and the Bank of England’s (BoE) monetary policy decision, which are scheduled for Wednesday and Thursday, respectively.
Economists estimate the annual UK core CPI – which excludes volatile components – to have grown at a faster pace of 3.5% from 3.3% in July, with headline inflation rising steadily by 2.2%. Investors will also focus on the UK service inflation data, a closely-watched indicator by BoE officials that has remained high.
The inflation data will significantly influence market speculation for BoE interest rate policy. Currently, financial market participants expect that the BoE will leave interest rates unchanged at 5% and expect it to deliver only one additional interest-rate cut in the remainder of the year.
Daily digest market movers: Pound Sterling outperforms major peers
- The Pound Sterling jumps to near 1.3160 against the US Dollar in Monday’s London session. The GBP/USD pair gains as investors expect that the BoE’s policy-easing cycle will be less aggressive than that from the Fed.
- The Fed is almost certain to begin cutting interest rates on Wednesday. However, traders remain split about whether the rate cut size will be of 25 or 50 basis points (bps). According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 bps to 4.75%-5.00% in September has increased sharply to 61% from 30% a week ago.
- Market speculation for the Fed's outsize interest rate cut has been strengthened after the release of the Producer Price Index (PPI) report for August, which showed that the headline producer inflation decelerated at a faster-than-expected pace to 1.7%. Some media reports have also contributed to expectations that the Fed could opt for a large cut.
- Before the Fed policy announcement, investors will focus on the United States (US) Retail Sales data for August, which will be published on Tuesday. Retail Sales data, a key measure of consumer spending, is estimated to have grown by 0.2%, slower than 1.0% increase seen in July.
Technical Analysis: Pound Sterling rises to near 1.3160
The Pound Sterling gains to near 1.3160 against the US Dollar. The GBP/USD pair extends its recovery after a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase 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.
The 14-day Relative Strength Index (RSI) reaches 60.00. A fresh round of bullish momentum could occur if the oscillator breaks above this level.
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.
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.