Pound Sterling holds onto gains against US Dollar on mounting Fed dovish bets
- The Pound Sterling clings to gains near 1.2700 against the US Dollar as traders have raised Fed dovish bets for the June meeting.
- US President Trump has imposed 25% tariffs on Canada and Mexico and an additional 10% on China.
- The BoE is expected to follow a gradual policy-easing cycle as the UK inflation is set to remain higher.
The Pound Sterling (GBP) trades firm near 1.2700 against the US Dollar (USD) in Tuesday’s European session. The GBP/USD pair holds onto Monday’s gains as the US Dollar extends its downside amid escalating dovish Federal Reserve (Fed) bets. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides to near 106.30.
Traders have raised bets supporting the Fed to resume the policy-easing cycle in the June meeting, which was paused in January. The likelihood for the central bank to reduce interest rates in June has increased to 86.9% from 69% recorded a week ago, according to the CME FedWatch tool.
An expected slowdown in the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for January, a sharp decline in Consumer Confidence for February – the first decline in the Personal Spending data for January in two years – and weak ISM Manufacturing PMI data for February have contributed to market expectations that the Fed could resume the monetary expansion cycle in June.
Going forward, investors will focus on the US ADP Employment Change, US ISM Services PMI, and the US Nonfarm Payrolls (NFP) data for February. All of them will be released during this week and are likely to influence market expectations for the Fed’s monetary policy outlook.
Daily digest market movers: Pound Sterling to be influenced by further development in Ukraine peace plan
- The Pound Sterling exhibits a mixed performance across the globe, with investors seeking further development in Ukraine’s peace plan. Over the weekend, pan-European leaders, including Ukrainian President Volodymyr Zelenskyy, agreed to structure a draft for ending the three-year-long war in Ukraine in a high-stakes summit in London.
- On a broader note, the outlook of the British currency remains firm as investors expect the Bank of England (BoE) to follow a gradual monetary expansion approach. These expectations have been bolstered by elevated United Kingdom (UK) wage growth, which could keep inflationary pressures persistently higher.
- Additionally, British Retail Consortium (BRC) Chief Executive, Helen Dickinson, has projected that inflation could rise further as retailers face a 7 billion pound ($8.88 billion) rise in annual costs this year due to a nearly 7% rise in the minimum wage, packaging levies and an increase in payroll taxes announced in UK Chancellor of the Exchequer Rachel Reeves’ Autumn budget, Reuters report.
- On the global front, US President Donald Trump’s tariff agenda is expected to keep investors on their toes. 25% tariffs on Canada and Mexico and an additional 10% levies on China have come into effect on Tuesday, signaling that fears of a global trade war have become real now. In retaliation, China has also slapped tariffs on major agricultural imports.
Technical Analysis: Pound Sterling strengthens near 1.2700
The Pound Sterling demonstrates strength near 1.2700 against the US Dollar on Tuesday. The GBP/USD pair recovered strongly on Monday after a mean-reversion move to the 20-day Exponential Moving Average (EMA) near 1.2580.
The 14-day Relative Strength Index (RSI) climbs above 60.00. A fresh bullish momentum would come into action if the RSI sustains above that level.
Looking down, the February 11 low of 1.2333 will act as a key support zone for the pair. On the upside, the 61% Fibonacci retracement level at 1.2924 will act as a key resistance zone.
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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