Pound Sterling consolidates at the start of Fed-BoE monetary policy week
- The Pound Sterling is stuck in a tight range around 1.2950 against the US Dollar, with investors awaiting the Fed-BoE monetary policy outcome later this week.
- US officials, including President Donald Trump, expect economic turbulence from new policies.
- The UK economy contracted by 0.1% and the factory data declined significantly in January.
The Pound Sterling (GBP) trades in a tight range against the US Dollar (USD) around 1.2950 at the start of the week. The GBP/USD pair is expected to trade cautiously as investors await the monetary policy decision from the Federal Reserve (Fed) and the Bank of England (BoE), which will be announced on Wednesday and Thursday, respectively. Both the Fed and the BoE are expected to keep interest rates steady.
According to the CME FedWatch tool, the Fed is almost certain to keep borrowing rates steady in the range of 4.25%-4.50%. This would be the second straight policy meeting in which the central bank will leave interest rates unchanged. Traders have remained increasingly confident about the Fed maintaining a status quo on Wednesday as officials have been arguing in favor of maintaining a “wait and see” approach amid uncertainty over the economic outlook under the leadership of US President Donald Trump.
Market participants expect President Trump’s economic policies to push inflation higher, and weigh on growth prospects in the near term. Flash University of Michigan’s (UoM) survey of consumers in March showed on Friday that respondents see five-year consumer inflation expectations at 3.9%, up from 3.5% projected in February. The preliminary Michigan Consumer Sentiment index came in significantly lower at 57.9 in March compared to estimates of 63.1 and the former reading of 64.7.
A slew of US officials such as President Trump, Commerce Secretary Howard Lutnick, and Treasury Secretary Scott Bessent have guided that Trump’s policies could lead to economic turbulence, but the transition will make America great again. Bessent said in an interview with NBC News on Sunday, “I can predict that we are putting in robust policies that will be durable, and could there be an adjustment,” adding that the country needed to be weaned off of “massive government spending.” His comments came after the interviewer asked whether Trump’s agenda could lead the economy to a recession.
Daily digest market movers: Pound Sterling to be influenced by BoE’s policy decision
- The Pound Sterling trades with caution against its major peers in European trading hours on Monday. The British currency is expected to remain on tenterhook, with investors focusing on the BoE’s monetary policy announcement on Thursday. Traders are confident about the BoE keeping interest rates steady as a slew of officials have guided a “gradual and cautious” interest rate cut approach.
- Investors will pay close attention to the monetary policy statement and BoE Governor Andrew Bailey’s press conference after the interest rate decision to get cues about the economic and monetary policy outlook.
- An economic contraction in the monthly United Kingdom (UK) Gross Domestic Product (GDP) and a sharp decline in the Industrial and Manufacturing Production data for January have raised concerns over the economic outlook. The BoE also halved its GDP growth forecast to 0.75% in the February policy meeting.
- This week, investors will also focus on the UK labor market data for three months ending January, which will be released on Thursday, too. Investors will keenly focus on the Average Earnings data, a key measure of wage growth that is a major driver of inflation in the services sector.
Technical Analysis: Pound Sterling consolidates below 1.3000
The Pound Sterling turns sideways after posting a fresh four-month high around the psychological level of 1.3000 against the US Dollar last week. The long-term outlook of the GBP/USD pair remains bullish as it holds above the 200-day Exponential Moving Average (EMA), which is around 1.2700.
The 14-day Relative Strength Index (RSI) holds above 60.00, indicating that the strong bullish momentum is intact.
Looking down, the 50% Fibo retracement at 1.2775 and the 38.2% Fibo retracement at 1.2618 will act as key support zones for the pair. On the upside, the October 15 high of 1.3100 will act as a key resistance zone.
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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