Pound Sterling continues to decline due to ramping UK gilt yields
- The Pound Sterling remains under pressure as investors expect higher UK gilt yields could force Chancellor Reeves to cut spending and raise taxes in the Autumn Budget.
- BoE’s Breeden said recent evidence supports a gradual withdrawal of policy restrictiveness.
- The next move in the US Dollar will be influenced by the US NFP data for December.
The Pound Sterling (GBP) continues underperforming its major peers, rattled by rising borrowing costs on the United Kingdom (UK) government’s debt. The 30-year UK gilt yields have risen to 5.36%, the highest level since 1998, causing discomfort for Chancellor of the Exchequer Rachel Reeves.
Market participants started dumping UK gilt securities amid fears of higher debt, lower growth, and potentially inflationary United States (US) President-elect Donald Trump policies, which could lead to economic stagflation. Investors anticipated that higher gilt yields would force Rachel Reeves to make fresh borrowings to fund day-to-day expenditures. Earlier, Reeves vowed to fund daily spending with tax receipts and cut public spending.
The British Finance Ministry remained committed to not seeking fresh borrowings. UK Treasury Minister Darren Jones clarified at the House of Commons on Thursday that the government's decision to borrow only for investment was "non-negotiable." Jones added that it is normal for the price of gilts to "vary" and assured that financial markets continue to function in an "orderly way."
Darren Jones also confirmed that public spending will be “in line with what was set out in the Autumn Budget” and added that there is no need for any “emergency intervention” by the Chancellor.
On the sharp spike in UK gilt yields, BoE Deputy Governor Sarah Breeden said that the rise in government’s borrowing costs is partly linked to uncertainty over “incoming policies from United States (US) President-elect Donald Trump” in her speech at the University of Edinburgh. When asked about her view on the monetary policy outlook, Breeden said: "The recent evidence further supports the case to withdraw “policy restrictiveness.” She added that the withdrawal of policy restrictiveness will be “gradual” over time.
Daily digest market movers: Pound Sterling weakens against US Dollar ahead of US NFP
- The Pound Sterling drops to near 1.2275 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair faces pressure as the US Dollar extends its upside ahead of the US Nonfarm Payrolls (NFP) data for December, which will be published at 13:30 GMT. Investors will pay close attention to the US NFP report as the Federal Reserve (Fed) pivoted to a dovish policy stance in September 2024 due to firm downside risks to labor demand.
- The outcome of the Fed’s December monetary policy meeting showed that officials were less concerned about labor market conditions and more worried about stalling progress in the disinflation trend. However, signs of weak labor demand could stem fears that job market conditions have yet to return to their restoration state, which could force officials to dial back their cautious stance on further policy easing.
- The US NFP report is expected to show that the economy added 160K fresh workers in December, lower than the previous release of 227K. The Unemployment Rate is expected to have remained steady at 4.2%. Investors will also focus on Average Hourly Earnings data, a key measure of wage growth that drives consumer spending. Signs of strong wage growth would prompt fears of a re-acceleration in price pressures. On the contrary, soft numbers will ease fears of inflationary pressures remaining persistent.
- Economists expect Average Hourly Earnings to have grown at a steady pace of 4% year-over-year. On a month-on-month basis, the wage growth measure is estimated to have risen by 0.3%, slower than the 0.4% in November.
- According to the CME FedWatch tool, traders are confident that the Fed will not cut interest rates till the March meeting but are divided over the policy announcement in May.
Technical Analysis: Pound Sterling is exposed to more downside
The Pound Sterling trades near a more-than-a-year-low around 1.2250 against the US Dollar (USD) on Friday. The GBP/USD pair faced a sharp sell-off after breaking below the January 2 low of 1.2350. The broader outlook for the Cable remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2490 and 1.2630, respectively, are declining.
The 14-day Relative Strength Index (RSI) drops sharply to near 30.00, suggesting a strong bearish momentum.
Looking down, the pair is expected to find support near the November 10, 2023, low of 1.2185. On the upside, the 20-day EMA 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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