Pound Sterling tries to hold onto recent rebound as BoE Bailey signals gradual rate-cut cycle
- The Pound Sterling ticks down on Friday against the US Dollar after moving higher on Thursday.
- The BoE signaled it would follow a more gradual rate-cut path.
- Both the Fed and the BoE cut interest rates by 25 bps on Thursday.
The Pound Sterling (GBP) trades lower against the US Dollar (USD) below the psychological resistance of 1.3000 in Friday’s London session. The GBP/USD weakens slightly as the US Dollar strives to gain ground after a sharp correction on Thursday. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, trades in a tight range near 104.50.
The Greenback retraced almost 60% of Wednesday’s rally on Thursday as traders unwinded some of the so-called ‘Trump trades’ and the Federal Reserve (Fed) Chair Jerome Powell’s commentary was interpreted as slightly dovish. The US Dollar rallied in October and in the first week of November as traders priced in Republican Donald Trump’s victory in the United States (US) presidential election.
The Federal Reserve cut interest rates by 25 basis points (bps) to 4.50%-4.75%, as expected. Jerome Powell said in the press conference following the decision that he remained confident over the continuation of the policy-easing cycle, adding that the disinflation trend towards the bank’s target of 2% is intact and that there are some signs of slowing labor market conditions.
On Trump’s victory, Powell said he sees no near-term effects on the interest rate path and refrained from speculating about it. Trump’s victory is widely seen as inflationary, given that he promised to raise import tariffs and lower corporate taxes in his election campaign.
According to the CME FedWatch tool, the likelihood of an interest rate cut of 25 bps to 4.25%-4.50% in the December meeting is 71.3%.
In Friday’s session, investors will focus on Fed’s Governor Michelle Bowman’s speech for fresh interest rate guidance, which is scheduled at 16:00 GMT. Still, it is uncertain if Bowman will talk about monetary policy as she participates in a symposium about banking.
Daily digest market movers: Pound Sterling outperforms the majority of its peers
- The Pound Sterling gains against the majority of its pairs on Friday, with the notable exception of the US Dollar, as the commentary from Bank of England (BoE) Governor Andrew Bailey on interest rates on Thursday was less dovish than what market participants had anticipated.
- After the bank reduced its key borrowing rates by 25 bps to 4.75%, Bailey commented that interest rates will continue to fall gradually if the economy evolves as expected. However, he emphasized that the monetary policy will remain restrictive until the risks of inflationary pressures remaining persistent get dissipated.
- When asked about the impact of last week’s Autumn Forecast Statement on the interest rate path, Bailey said: "I don't think that it's sensible to conclude that the path of interest rates will be particularly different." However, Bailey also said that fiscal measures would boost the overall growth by around three-quarters of a percent at their peak in a year's time, pointing to stronger and relatively front-loaded paths for government consumption and investment, more than offsetting the impact on growth of higher taxes, Reuters reported.
- Bailey refrained from making any presumption about the impact of US Donald Trump's administration on the UK economy but said that the central bank will remain vigilant to Trump's trade policy decisions.
- Going forward, investors will focus on BoE Chief Economist Huw Pill’s speech at 12:15 GMT for fresh interest rate guidance and the employment data for the three months ending September, which will be published on Tuesday.
Technical Analysis: Pound Sterling remains on tenterhooks below 1.3000
The Pound Sterling trades at make or a break against the US Dollar near the breakdown region of a Rising Channel pattern, just below 1.3000 on Friday, after rebounding from a fresh 11-week low near 1.2830 on Wednesday. The GBP/USD pair remains well-supported by the 200-day Exponential Moving Average (EMA) around 1.2860.
However, the near-term trend is bearish as the 20-day and 50-day EMAs, around 1.3000 and 1.3035, respectively, are declining.
The 14-day Relative Strength Index (RSI) hovers near 40.00. A bearish momentum would resume if the RSI (14) fails to hold this level.
Looking down, the round-level support of 1.2800 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near the psychological figure of 1.3000.
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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