Pound Sterling gains on upbeat UK Retail Sales
- The Pound Sterling outperforms its major peers as UK Retail Sales grew at a faster-than-expected pace in August
- Fears of UK inflation remaining persistent have deepened after an acceleration in price pressures coming from the services sector.
- The Fed is expected to continue an aggressive policy-easing cycle.
The Pound Sterling (GBP) performs strongly against its major peers on Friday. The British currency strengthens as the United Kingdom (UK) Retail Sales data for August came in stronger than expected. The Retail Sales data, a key measure of consumer spending, rose at a robust pace of 2.5% on year, higher than the estimates of 1.4% and July’s print of 1.5%. On month, Retail Sales grew by 1% against expectations of 0.4% and the 0.5% advance registered in July.
The report showed that households spent heavily on textile clothing and footwear stores and food stores, while sales receipts at other non-food stores declined. Signs of robust demand for durable items could further fuel price pressures, a potential concern after core inflation already came in hotter-than-expected in August. The persistence of high price growth in certain parts of the economy guided the Bank of England (BoE) to leave interest rates unchanged at 5% in Thursday’s policy meeting.
The BoE kept its borrowing rates steady, with an 8-1 vote split. BoE external policy member Swati Dhingra was the only one among the Monetary Policy Committee who voted to cut interest rates by 25 basis points (bps) for the second time in a row. Investors were expecting that Deputy Governor Dave Ramsden would also vote for a cut, but he didn't.
Also, BoE members unanimously voted to trim their government bonds holdings by 100 billion pounds over the coming 12 months.
Daily digest market movers: Pound Sterling strengthens against US Dollar on dovish Fed bets
- The Pound Sterling refreshes a two-year high above the crucial resistance of 1.3300 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair strengthens as the US Dollar faces severe selling pressure amid growing speculation that the Federal Reserve’s (Fed) policy-easing cycle will continue in the last quarter of the year. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides below the crucial support of 100.50 and is declining towards a year-to-date low of 100.21.
- The Fed kicked off its policy easing cycle on Wednesday with a larger-than-usual rate cut of 50 basis points (bps), pushing borrowing rates lower to 4.75%-5.00%. This bumper rate cut from the Fed was a clear signal that policymakers are more focused on restoring labor market health and are confident about inflation returning to the bank’s target of 2%.
- According to the CME FedWatch tool, the Fed is expected to cut borrowing rates further by 75 bps in the remaining two meetings this year, suggesting that there will be one more 50 bps rate cut. The tool also shows that the likelihood of the Fed reducing interest rates by 50 bps in November is at 43%, higher than the 37% recorded on Thursday. On the contrary, Fed policymakers see the federal fund rates heading to 4.4% by the year-end, a smaller reduction than the one that markets are pricing in.
- Going forward, the next trigger for the Pound Sterling and the US Dollar will be preliminary S&P Global PMI data for September, which will be published on Monday.
Technical Analysis: Pound Sterling rises above 1.3300
The Pound Sterling aims to gain firm-footing above 1.3300 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as it holds above the 20-day Exponential Moving Average (EMA) near 1.3150. Earlier, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21.
The 14-day Relative Strength Index (RSI) shifts above 60.00, suggesting an active bullish momentum
Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.
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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