Pound Sterling attempts to gain ground after UK Retail Sales data
- The Pound Sterling finds cushion after the release of the UK Retail Sales data for November, even though growth was lower than anticipated.
- A higher number of BoE officials voted for an interest rate cut on Thursday, boosting dovish bets for 2025.
- Investors await the US PCE inflation data for November for fresh Fed interest rate cues.
The Pound Sterling (GBP) attempts to recover against its major peers on Friday after the release of the United Kingdom (UK) Retail Sales data for November, which rose less than anticipated. The Retail Sales data, a key measure of consumer spending, rose by 0.2% in the month, slower than estimates of 0.5% but recovering from a 0.7% decline in October.
Retail Sales grew at a moderate pace of 0.5% year over year, against expectations of 0.8% and the former release of 2%, which was downwardly revised from 2.4%. The report showed that clothing demand remained weak, while sales were higher at other non-food stores.
The UK Office for National Statistics (ONS) reported that the impact of the Black Friday sale was not taken into account in the November data as it commenced on November 29. The agency covered data for four weeks, from October 27 to November 23.
On a broader note, the outlook of the British currency is uncertain as the Bank of England (BoE) monetary policy meeting on Thursday showed a dovish buildup on the policy outlook. The BoE left its key borrowing rates unchanged at 4.75%, as expected, as UK inflation has accelerated in the last three months. Still, three policymakers proposed cutting interest rates against one as anticipated by market participants.
BoE Governor Andrew Bailey refrained from committing a pre-defined rate cut path. “Due to heightened uncertainty in the economy, we can't commit to when or by how much we will cut rates in 2025,” he said.
Meanwhile, traders price in a 53 basis points (bps) interest rate reduction by the BoE in 2025 after the policy announcement.
Daily digest market movers: Pound Sterling posts fresh seven-month low against USD
- The Pound Sterling rebounds after posting a fresh seven-month low near 1.2470 against the US Dollar (USD) on Friday. The GBP/USD pair recovers slightly as the US Dollar Index (DXY) gives up intraday gains after refreshing a two-year high around 108.50 ahead of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for November, which will be published at 13:30 GMT.
- Investors will pay close attention to PCE inflation as Federal Reserve (Fed) officials have become more worried about stalling progress in disinflation than downside risks to employment. The US core PCE inflation, the Fed’s preferred inflation gauge, is estimated to have grown at a faster pace of 2.9% from 2.8% in October. Month over month, the underlying inflation data is expected to have risen by 0.2% compared to 0.3% in October.
- The outlook for the US Dollar has strengthened. In the policy meeting on Wednesday, the Fed cut key borrowing rates by 25 basis points (bps) to the 4.25%-4.50% range as expected but guided a slower rate-cut trajectory for 2025. The Fed’s dot plot showed that officials collectively see federal fund rates heading to 3.9% by 2025, up from the 3.4% projected in September.
- The Fed signaled fewer rate cuts for the next year as officials are confident in strong economic growth. This forced them to be cautious about further policy easing. Meanwhile, the third estimate for Q3 Gross Domestic Product (GDP) came in higher at 3.1% compared to the second estimate of 2.8%.
Technical Analysis: Pound Sterling weakens on death cross formation
The Pound Sterling weakens against the US Dollar on a decisive break below the upward-sloping trendline around 1.2600, which is plotted from the October 2023 low of 1.2035.
A death cross, represented by the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.2790, suggests a strong bearish trend in the long run.
The 14-day Relative Strength Index (RSI) slides below 40.00, suggesting that a fresh downside momentum has been triggered.
Looking down, the pair is expected to find a cushion near the April 22 low around 1.2300. On the upside, the December 17 high at 1.2730 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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