Pound Sterling declines against US Dollar ahead of Fed’s monetary policy announcement
- The Pound Sterling drops to near 1.3330 against the US Dollar ahead of the Fed’s monetary policy announcement.
- The Fed is expected to hold interest rates steady, while the BoE is set to reduce them on Thursday.
- US-China trade talks will be the key trigger for the global market.
The Pound Sterling (GBP) falls slightly to near 1.3330 against the US Dollar (USD) during European trading hours on Wednesday. The GBP/USD pair faces pressure as the USD ticks higher ahead of the Federal Reserve (Fed) monetary policy announcement at 18:00 GMT, in which the central bank is almost certain to keep interest rates steady in the current range of 4.25-4.50%.
This would be the third straight policy meeting in which the Fed will leave borrowing rates steady amid uncertainty over how new economic policies by United States (US) President Donald Trump will shape the economy. A string of Fed officials, including Chair Jerome Powell, have guided that “wait and see” is an optimal approach until they get clarity on how much new policies will influence inflation and the economic outlook.
US consumer inflation expectations have elevated as local business owners have clarified that they will pass on the impact of high import duties to consumers, a compelling factor for the Fed to demand more time before making any monetary policy adjustments. Additionally, steady job growth in the wake of Trump’s tariff policies is another limiting factor for the Fed to act prematurely by lowering interest rates.
Daily digest market movers: Pound Sterling is broadly firm, BoE policy in focus
- The Pound Sterling takes a breather on Wednesday after a sharp upside move the previous day. The British currency remains firm against its peers as the United Kingdom (UK) and the US are close to signing a bilateral trade deal.
- A report from the Financial Times (FT) showed on Tuesday that both countries are close to a trade agreement in which the US will lower tariffs on UK steel and cars. In return, the UK would reduce tariffs on autos and agricultural products from the US and make changes to the digital services tax.
- Going forward, the major trigger for the British currency will be the Bank of England’s (BoE) monetary policy decision, which will be announced on Thursday. The BoE is expected to reduce interest rates by 25 basis points (bps) to 4.25%. This would be the fourth interest rate cut by the BoE in the current monetary easing cycle, which started in August last year.
- Investors will pay close attention to the BoE’s guidance on the monetary policy and the economic outlook. Market experts believe that the BoE could guide an aggressive policy-easing outlook in the wake of the US-China trade war. Investors worry that China would move to other economies to sell its products. Given the low-cost competitive advantage of China, the competitiveness of products from other nations would diminish if Beijing pushes more products into the global market.
- Meanwhile, the US and China have agreed to trade discussions this week. US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer confirmed on late Tuesday that they will meet their Chinese counterparts for trade discussions this week in Geneva. This will be the first confirmed meeting between the world’s two largest powerhouses since the imposition of reciprocal tariffs and retaliatory duties announced by the US and China, respectively.
- Earlier this week, US Secretary Bessent signaled that Washington will have trade talks with Beijing sooner as these tariff rates are not sustainable. A positive outcome from the US-China trade talks will be favorable for risky assets across the globe.
Technical Analysis: Pound Sterling holds key level of 1.3300
The Pound Sterling corrects 0.3% to near 1.3330 against the US Dollar at the time of writing, but still holds the key level of 1.3300. The overall outlook remains bullish as all short-to-long Exponential Moving Averages (EMAs) are sloping higher.
The 14-day Relative Strength Index (RSI) strives to return above 60.00. A fresh bullish momentum would trigger if the RSI manages to do so.
On the upside, the three-year high of 1.3445 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.