Pound Sterling gains as UK yields cool down on fresh acceleration in BoE dovish bets
- The Pound Sterling outperforms its major peers as soft UK data weighs on gilt yields.
- Market experts project a 100 bps interest rate reduction by the BoE this year.
- The risk profile turns favorable for risky assets ahead of Trump’s inauguration.
The Pound Sterling (GBP) bounces back against its major peers at the start of the week. Gains in the British currency are partly driven by a further advancement in demand for United Kingdom (UK) gilts due to weak UK Retail Sales data for December and an increasing demand for risky assets ahead of United States (US) President-elect Donald Trump’s inauguration.
A strong buying interest for UK gilts has weighed heavily on the government’s borrowing costs, pushing 30-year yields further lower to near 5.20% from its more-than-26-year high of 5.47% recorded on January 13. An unexpected decline in the UK Retail Sales data has further accelerated the Bank of England's (BoE) dovish bets. Monthly Retail Sales contracted by 0.3%, while it was expected to grow at a faster rate of 0.4% from a 0.1% increment in November. Analysts at Oxford Economics expect the BoE to cut interest rates by 100 basis points (bps) to 3.75% by the year-end.
UK gilt yields peaked last week after the release of softer-than-expected Consumer Price Index (CPI) data for December, which increased speculation for the BoE to cut its borrowing rates in the coming policy meeting on February 6.
It is worth noting that the size of the decline in UK gilt yields is larger than the recovery in the Pound Sterling as weak UK data has boosted dovish BoE bets, which are technically GBP-negative. Higher bets for lower BoE interest rates bode poorly for the Pound Sterling. Meanwhile, UK equity markets have sharply rallied in the last few trading days as Chancellor of the Exchequer Rachel Reeves won’t be forced to raise taxes or cut public spending to fulfill her economic agenda.
Going forward, the next move in the Pound Sterling will be guided by the UK employment data for the three months ending November, which will be published on Tuesday.
Daily digest market movers: Pound Sterling rises against US Dollar ahead of Trump’s inauguration
- The Pound Sterling rebounds to near 1.2200 against the US Dollar (USD) in Monday’s European Session. The GBP/USD pair rises as the safe-haven appeal of the US Dollar diminishes ahead of Trump’s swearing-in ceremony for the Presidential charge. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 109.00.
- The broader outlook for the US Dollar remains firm as investors expect economic policies under Trump’s administration to be pro-growth and inflationary for the US economy. According to a report from Fox Digital News, Trump is expected to sign over 200 orders on the first day of high return to the White House. His orders might include immigration controls, higher tariffs, and lower taxes.
- The US economic calendar has little to offer this week except for the S&P Global preliminary Purchasing Managers Index (PMI) data for January, which will be published on Friday. Until then, the Greenback will be influenced by market expectations for the Federal Reserve’s (Fed) monetary policy outlook for the entire year.
- According to the CME FedWatch tool, traders are pricing in more than one 25 bps interest rate cut this year, seeing the first in the June meeting.
Technical Analysis: Pound Sterling ranges around 1.2200
The Pound Sterling trades higher around 1.2200 against the US Dollar on Monday but has been broadly sideways between 1.2100 and 1.2300 for a week. The outlook for the GBP/USD pair remains bearish as the 50-day EMA slopes downwards around 1.2538.
The 14-day Relative Strength Index (RSI) remains inside the 20.00-40.00 range, suggesting a strong bearish momentum.
Looking down, the pair is expected to find support near the October 2023 low of 1.2050. On the upside, the January 15 high of 1.2306 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.
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