Pound Sterling clings to gains ahead of US data, UK elections outcome
- The Pound Sterling holds gains against the US Dollar as Fed’s Powell seems confident that disinflation has resumed.
- UK elections outcome will be the major trigger for the Pound Sterling.
- The US Dollar will dance to the tunes of US ISM Servies PMI, the ADP Employment Change for June, and the FOMC minutes.
The Pound Sterling (GBP) consolidates below the round-level resistance of 1.2700 in Wednesday’s London session after a sharp recovery from the three-day low of 1.2615 on Tuesday. The GBP/USD pair exhibits strength as the near-term outlook of the US Dollar (USD) has become uncertain after the speech from Federal Reserve (Fed) Chair Jerome Powell at the European Central Bank (ECB) Forum on Central banking on Tuesday prompted optimism on rate cuts.
Powell said recent data suggests that the disinflation process has resumed, though we need more good inflation data before reducing interest rates. Powell added that risks to inflation are more balanced. He also said that an unexpected weakness in the labor market could force them to react on interest rates.
Powell’s improved confidence in the progress in disinflation has kept speculation on rate cuts in September firm. Going forward, the major trigger for the US Dollar will be the United States (US) Nonfarm Payrolls (NFP) report for June, which will be published on Friday.
In Wednesday’s session, investors will keenly focus on the ADP Employment Change, the US ISM Services Purchasing Managers Index (PMI) data for June, and the Federal Open Market Committee (FOMC) minutes for the June meeting.
The ADP Employment report is expected to show that private sector employers hired 160K job-seekers, slightly higher than May’s reading of 152K. The ISM Services PMI is estimated to have expanded at a slower pace of 52.5 from the former release of 53.8. Investors will also focus on the Prices Paid, a sub-component of Services PMI, which indicates cost pressures in the service sector.
The FOMC minutes will provide cues about when the Fed will start reducing interest rates.
Daily digest market movers: Pound Sterling weakens against the US Dollar and Australian Dollar
- The Pound Sterling outperforms the majority of its peers except the US Dollar and the Australian Dollar (AUD). The US Dollar rebounds in European trading hours after correcting on Tuesday and the Australian Dollar is upbeat as expectations for rate cuts by the Reserve Bank of Australia (RBA) have been postponed to April 2025 from February of the same year projected earlier.
- The British currency clings to gains as Bank of England (BoE) policymakers worry about stubborn inflation in the United Kingdom (UK) service sector, which has been refraining from leaning towards policy easing. While inflation in other sectors has declined significantly due to weak demand from domestic and overseas markets.
- Due to the absence of top-tier economic data this week, investors will majorly focus on headlines relating to the UK elections, which kick off on Thursday. The UK Prime Minister Rishi Sunak-led Conservative Party is expected to suffer a defeat from the opposition Labor Party.
- New government formation is expected to deliver expansionary fiscal policies, which could boost price pressures and force the BoE to maintain a restrictive stance on interest rates for a longer period than previously expected.
Technical Analysis: Pound Sterling climbs above 61.8% Fibo retracement
The Pound Sterling trades sideways against the US Dollar after recovering sharply from the round-level support of 1.2600. The GBP/USD pair moves higher above the 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 rises above the 50-day Exponential Moving Average (EMA) near 1.2666 and is aiming to climb above the 20-day EMA, which trades around 1.2680
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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