Pound Sterling falls against USD as trading volume squeezes on Thanksgiving Day
- The Pound Sterling falls to near 1.2650 against the USD as the latter bounces after plunging on Wednesday.
- Market speculation for the Fed to cut interest rates in December has increased.
- BoE’s Lombardelli supports reducing interest rates gradually amid risks of inflation overshooting the bank’s target.
The Pound Sterling (GBP) declines to near 1.2650 against the US Dollar (USD) in Thursday’s London session after failing to visit the round-level resistance of 1.2700 the prior day. The GBP/USD pair is expected to trade sideways amid thin trading volume as United States (US) markets are closed on Thursday and will open for a short duration on Friday on account of Thanksgiving Day.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, bounces back to near 106.40 after a sharp sell-off on Wednesday. The USD plunged as investors trimmed the so-called “Trump Trades” with the intention to go light in an extended weekend.
The Greenback was also pressured by weak Durable Goods Orders data for October. New orders for Durable Goods grew by 0.2% in the month, slower than the estimates of 0.5%. Meanwhile, the Personal Consumption Expenditures Price Index (PCE) report for October showed that price pressures rose in line with estimates. The core PCE inflation data – which excludes volatile food and energy prices – rose by 2.8%, as expected, faster than 2.7% in September.
An expected increase in the US PCE inflation data has boosted market expectations for the Fed to cut interest rates by 25 basis points (bps) again in the December meeting. At the time of writing, there is a 68% chance that the Fed will cut its key borrowing rate by 25 bps to the 4.25%-4.50% range next month, escalated from 56% a week ago, according to the CME FedWatch tool.
Going forward, investors will focus on the US ISM Manufacturing Purchasing Managers Index (PMI) data for November, which will be published on Monday. The economic data will show the current status of activities in the manufacturing sector.
Daily digest market movers: Pound Sterling remains broadly firm against its major peers
- The Pound Sterling exhibits an indecisive action against its major peers on Thursday. The British currency is broadly sideways as the United Kingdom (UK) economic calendar has nothing to offer in the later part of the week.
- The performance of the Pound Sterling has remained strong against its peers for a few weeks, except the US Dollar, on expectations that the Bank of England (BoE) will be one of those central banks that will follow a gradual policy-easing approach due to persistent upside risks to inflation.
- BoE Deputy Governor Clare Lombardelli warned about risks of inflation remaining higher than the bank’s forecast where wage growth normalizes at 3.5%-4% and the Consumer Price Index (CPI) around 3% rather than 2% in her speech at King's Business School on Monday. Lombardelli added, “I support a gradual removal of monetary policy restriction.”
- Going forward, the Pound Sterling will be guided by market speculation about whether the BoE will cut interest rates in the December meeting. Traders are highly confident that the central bank will leave its key borrowing rates unchanged at 4.75% next month.
Technical Analysis: Pound Sterling drops after facing resistance near 1.2700
The Pound Sterling falls to near 1.2650 against the US Dollar in European trading hours on Thursday. The GBP/USD pair corrects after posting a fresh weekly high near 1.2700 the prior day. The recovery move in the Cable came after it found buying interest near the upward-sloping trendline around 1.2550, which is plotted from the October 2023 low around 1.2040.
The 14-day Relative Strength Index (RSI) rebounds after turning oversold. However, the downside bias remains afloat.
Looking down, the pair is expected to find a cushion near the psychological support of 1.2500. On the upside, the 20-day Exponential Moving Average (EMA) around 1.2725 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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