Pound Sterling exhibits strength against US Dollar on firm Fed rate-cut prospects
- The Pound Sterling moves higher against the US Dollar as the Fed is expected to begin reducing interest rates in September.
- UK annual headline inflation has returned to the desired rate of 2%.
- Investors await the US ISM Manufacturing PMI for fresh guidance on interest rates.
The Pound Sterling (GBP) performs strongly against its major peers in Monday’s London session. The British currency strengthens as investors remain uncertain about when the Bank of England (BoE) will start reducing interest rates.
Headline inflation in the United Kingdom (UK) has already returned to the desired rate of 2%. However, BoE policymakers see price pressures in the service sector as a preferred inflation measure, which is significantly higher than what is needed to gain confidence for rate cuts.
Currently, financial markets expect that the BoE will begin lowering interest rates from the August meeting.
Meanwhile, the Pound Sterling is expected to remain uncertain ahead of the UK elections outcome, which will kick off on July 4. According to the latest exit polls, the opposition Labor Party is expected to win from UK Prime Minister Rishi Sunak-led Conservative Party.
Daily digest market movers: Pound Sterling outperforms its peers
- The Pound Sterling exhibits a strong performance against the US Dollar (USD). The GBP/USD pair moves higher to 1.2680 as the US Dollar declines after the United States (US) Personal Consumption Expenditures Price Index (PCE) report for May showed that price pressures declined expectedly. Annual core PCE inflation, the Federal Reserve’s (Fed) preferred inflation measure, decelerated to 2.6% from the prior release of 2.8%.
- The expected decline in the US inflation prompts expectations of Fed rate-cut bets for September. According to the CME FedWatch tool, 30-day Federal Fund futures pricing data shows that the probability for rate cuts in September is 63.4%. The data also shows that the Fed will deliver two rate cuts this year against one signaled by officials in their latest dot plot.
- Fed officials continue to argue in favor of keeping interest rates at their current levels until they get evidence that inflation will decline to the desired rate of 2%. The Fed wants to see inflation decline for months before pivoting to policy-normalization.
- Last week, Atlanta Fed Bank President Raphael Bostic said rate cuts would become appropriate when they are convinced that inflation is on a clear path towards 2%. When asked about a concrete timeframe for rate cuts, Bostic said: "I continue to believe conditions will likely call for a cut in the federal funds rate in the fourth quarter of this year," Reuters reported.
- This week, the US Dollar is expected to deliver a volatile performance as the official ISM Purchasing Managers’ Index (PMI) and employment data for June are scheduled for release. In Monday’s session, investors will focus on the ISM Manufacturing PMI data, which will be published at 14:00 GMT.
- The Manufacturing PMI report is expected to show that factory activity improved but remained below the 50.0 threshold, which separates expansion from contraction, seen at 49.0 from the prior release of 48.7.
Technical Analysis: Pound Sterling hovers near 50-day EMA
The Pound Sterling rises to 1.2680 against the US Dollar after extending its recovery from an almost seven-week low of 1.2610. The GBP/USD pair moves higher but struggles to hold above 61.8% Fibonacci retracement support at 1.2667, plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300.
The Cable hovers near the 50-day Exponential Moving Average (EMA) near 1.2640, suggesting uncertainty over the near-term outlook.
The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating indecisiveness among market participants.
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.
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