Pound Sterling demonstrates strength ahead of BoE Bailey’s testimony
- The Pound Sterling rises ahead of BoE Andrew Bailey’s testimony before Parliament's Treasury Committee.
- Investors worry that US President Trump’s tariff agenda could weigh on the US economic growth.
- Bloating Fed dovish bets have weighed on the US Dollar.
The Pound Sterling (GBP) trades higher against its major peers on Wednesday ahead of Bank of England (BoE) Governor Andrew Bailey’s testimony before Parliament's Treasury Committee scheduled at 14:30 GMT. Investors will pay close attention to Bailey’s testimony to get cues about the BoE’s monetary policy outlook.
In February’s policy meeting, the BoE reduced its borrowing rates by 25 basis points (bps) to 4.5% but guided a ‘cautious and gradual’ interest rate cut approach. The BoE warned that inflationary pressures could accelerate in the third quarter of the year due to higher energy prices before returning to the 2% path.
Traders expect the BoE to follow a moderate policy-easing cycle amid fears of inflationary pressures remaining persistently higher and see the central bank cutting interest rates two times more this year. Fears of elevated price pressures are based on the assumption that business owners will pass on the impact of higher employment cost in the face of an increase in employers’ contribution to National Insurance (NI) announced by Chancellor of the Exchequer Rachel Reeves in the Autumn Budget.
On the global front, market participants expect a nominal impact of United States (US) President Donald Trump’s tariffs on the United Kingdom (UK) economy, given that Britain has a trade surplus against the US. Also, after meeting with UK Prime Minister Keir Starmer last week, Trump said that a trade deal could be made "pretty quickly" where tariffs “wouldn't be necessary".
Daily digest market movers: Pound Sterling outperforms US Dollar
- The Pound Sterling jumps to near 1.2850 against the US Dollar (USD) in European trading hours on Wednesday, the highest level seen since November 12. The GBP/USD pair extends its winning streak for the third trading day due to continuous underperformance from the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 105.00.
- The US Dollar weakens as it loses its risk premium stemming from US President Trump’s tariff agenda. On Tuesday, 25% tariffs on Canada and Mexico, and an additional 10% on China came into effect for pouring drugs into the US economy.
- Market experts believe Trump’s tariffs could weaken households' overall spending, assuming that higher levies will be borne by US importers, who would pass on to end consumers. Such a scenario would diminish the purchasing power of individuals, forcing them to cut spending significantly.
- Meanwhile, escalating Federal Reserve (Fed) dovish bets have also contributed to weakness in the US Dollar. Fed dovish bets have swelled after a slew of weak US economic data. According to the CME FedWatch tool, the likelihood for the Fed to reduce interest rates in June has increased to 80% from 70% recorded a week ago.
- For more guidance on interest rates, investors will focus on the US Nonfarm Payrolls (NFP) data for February, which will be released on Friday. In Wednesday’s session, market participants will pay attention to the US ADP Employment Change and the ISM Services PMI for February, which will be published during the North American session.
Technical Analysis: Pound Sterling jumps above 50% Fibo retracement
The Pound Sterling breaks above the 50% Fibonacci retracement level plotted from the late September high to mid-January low, around 1.2770. The long-term outlook of the GBP/USD pair has turned bullish as it climbs above the 200-day Exponential Moving Average (EMA), which is around 1.2680.
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 38.2% Fibo retracement at 1.2608 will act as a key support zone for the pair. On the upside, the psychological 1.3000 level 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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