Pound Sterling briefly drops as BoE Bailey says he sees four interest rate cuts in 2025
- The Pound Sterling experiences a whipsaw move after BoE Governor Bailey predicted four interest-rate cuts in 2025 as he expects the disinflation process is embedded.
- Traders expect the BoE to keep interest rates steady at 4.75% at this month's meeting.
- Investors await a slew of US economic data and Fed Powell’s speech.
The Pound Sterling (GBP) faces selling pressure against all its major peers on Wednesday after Bank of England (BoE) Governor Andrew Bailey forecasted four interest-rate cuts in 2025 in an interview with Financial Times (FT).
Andrew Bailey reiterated that interest rates should be lowered gradually and emphasized the need to do more to bring inflation down even though the “disinflation process is well embedded”. When asked about the impact of tariffs by US President-elect Donald Trump on the United Kingdom (UK) inflation, Bailey said that these effects "are not straightforward to predict.”
Bailey didn’t guide about the likely interest rate action in the monetary policy meeting on December 19, but traders expect the BoE to leave interest rates unchanged at 4.75%.
Market expectations for the BoE to keep interest rates steady have been prompted by fears of United Kingdom (UK) inflation remaining persistent. UK’s inflation report for October showed that the annual core Consumer Price Index (CPI) – which excludes volatile items – accelerated to 3.3% and the service inflation rose to 5%. Inflation in the services sector is closely tracked by BoE officials for decision-making on the interest rate policy.
Daily digest market movers: Pound Sterling turns upside down against US Dollar
- The Pound Sterling broadly consolidates against the US Dollar (USD) after facing selling pressure near 1.2700 in London trading hours on Wednesday. The GBP/USD pair is experiencing some whipsaw moves as the US Dollar (USD) rises.
- Investors will pay close attention to the US Nonfarm Payrolls (NFP) data on Friday as the Federal Reserve (Fed) started the policy-easing cycle in September amid worries over deteriorating labor demand, with high confidence over inflation remaining on a sustainable path to the bank’s target of 2%.
- In Wednesday’s session, investors will focus on Fed Chair Jerome Powell’s speech at the New York Times DealBook Summit for fresh guidance on interest rates. The probability for the Fed to cut interest rates by 25 basis points (bps) to 4.25%-4.50% is at 74%, while the rest favors leaving them unchanged at their current levels, according to the CME FedWatch tool.
- On the economic front, investors will look at the US ADP Employment Change and the ISM Services Purchasing Managers’ Index (PMI) data for November on Wednesday. Economists expect the US private sector to have added fresh 150K jobs in November, significantly lower than 233K in October. In the same period, the Services PMI is estimated to have grown at a slower pace to 55.5 from the prior release of 56.0. A figure above 50.0 signals an expansion in economic activity.
Technical Analysis: Pound Sterling drops from 20-day EMA
The Pound Sterling faces sellers against the US Dollar after a mean-reversion move to near the 20-day Exponential Moving Average (EMA) around 1.2710. The GBP/USD pair could fall further as its outlook remains bearish, with all short-to-long-term Exponential Moving Averages (EMAs) sloping downwards.
The 14-day Relative Strength Index (RSI) rebounds after turning oversold. However, the downside bias is still intact.
Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from March 2023 low near 1.1800. On the upside, the 200-day Exponential Moving Average (EMA) around 1.2830 will act as key resistance.
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.
Recommended Articles
