Pound Sterling outperforms US Dollar as Fed dovish bets rise on weak US Services PMI
- The Pound Sterling jumps to near 1.2700 against a weakened US Dollar after a sharp slowdown in US services sector data for February.
- Traders expect the BoE to cut interest rates two times more this year.
- This week, investors will focus on the US Durable Goods and PCE inflation data for January.
The Pound Sterling (GBP) gains sharply to near the key resistance of 1.2700 against the US Dollar (USD) in European trading hours on Monday. The GBP/USD pair trades firmly as the US Dollar underperforms its peers, except the Japanese Yen (JPY), due to weak Unites States (US) services sector activity data, which increased bets for an interest rate cut by the Federal Reserve (Fed) in June. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 106.10, the lowest level in almost 12 weeks.
On Friday, the US preliminary S&P Global Purchasing Managers Index (PMI) report showed a significant slowdown in business activity in February. The Composite PMI rose at a slower pace to 50.4 from 52.7 in January as activities in the services sector declined unexpectedly. The Services PMI contracted to 49.7 from 52.9, falling below the 50 threshold for the first time in 25 months. Economists expected the service sector activity to have expanded at a slightly faster pace to 53.0.
Service providers commonly linked the downturn in activity and worsening new orders growth to political uncertainty, notably in relation to federal spending cuts and potential policy impacts on economic growth and inflation outlooks, according to the S&P Global PMI report.
According to the CME FedWatch tool, the probability of the Fed’s interest rates remaining unchanged at the current range of 4.25%- 4.50% is 41.1%, down from nearly 50% before the PMI release.
On the contrary, the Manufacturing PMI expanded faster than expected to 51.6 in February from estimates of 51.5 and the former reading of 51.2.
The business activity data indicates the positive impact of US President Donald Trump’s tariff agenda on the country’s manufacturing sector. Trump had already mentioned in his comments that tariffs on imports would boost production activities locally, fulfilling his agenda of making “America great again”.
This week, investors will focus on the US Durable Goods Orders and the Personal Consumption Expenditures Price Index (PCE) data for January, which will be released on Thursday and Friday, respectively.
Daily digest market movers: Pound Sterling gains as BoE seems to follow slower monetary easing cycle
- The Pound Sterling outperforms its major peers at the start of the week as investors expect the Bank of England (BoE) to follow a moderate policy-easing cycle this year. Upbeat United Kingdom (UK) Retail Sales, hotter-than-expected Consumer Price Index (CPI) data for January, and strong wage growth momentum in three months ending December have forced traders to pare BoE dovish bets.
- Traders expect the BoE to cut interest rates two more times this year, according to money market expectations. The BoE also reduced its key borrowing rates by 25 basis points (bps) to 4.5% in the policy meeting earlier this month.
- Contrary to market expectations, analysts at TD Securities expect the BoE to cut interest rates four times more this year amid uncertainty over potential tariffs from a second Trump presidency. However, the agency has revised its forecast for the next interest rate cut to May from March due to recent stronger-than-expected UK economic data.
- Going forward, speeches from BoE policymakers will influence the British currency. Clare Lombardelli, Swati Dhingra, and Deputy Governor Dave Ramsden are set to speak on Monday, and they could provide fresh cues about the monetary policy outlook.
- On the economic data front, flash S&P Global/CIPS PMI data for February has come in line with estimates. The Composite PMI expanded at a slower pace to 50.5 from 50.6 in January. Activities in the manufacturing and services sectors contracted and expanded, respectively, at a surprisingly faster pace.
Technical Analysis: Pound Sterling rises to near 200-day EMA
The Pound Sterling gathers strength to extend its upside to near the 200-day Exponential Moving Average (EMA), which stands around 1.2680, against the US Dollar in Monday’s European session. The GBP/USD pair strengthened after breaking above the 38.2% Fibonacci retracement from the end-September high to the mid-January low downtrend around 1.2620.
The 14-day Relative Strength Index (RSI) holds above 60.00. The bullish momentum would strengthen if the RSI (14) sustains above that level.
Looking down, the February 11 low of 1.2333 will act as a key support zone for the pair. On the upside, the 50% and 61.8% Fibonacci retracement at 1.2770 and 1.2927, respectively, will act as key resistance zones.
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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