Pound Sterling holds onto gains against US Dollar ahead of Fed-BoE policy outcome
- The Pound Sterling grips gains near 1.3000 against the US Dollar as the DXY Index struggles to hold the five-month.
- Fed officials could project a higher number of interest rate cuts this year.
- The Fed and the BoE are expected to keep interest rates steady on Wednesday and Thursday, respectively.
The Pound Sterling (GBP) clings to gains near the psychological figure of 1.3000 against the US Dollar (USD) in European trading hours on Tuesday. The GBP/USD pair demonstrates strength as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to hold the five-month low of 103.20.
The Greenback faces pressure as investors expect Federal Reserve (Fed) officials could guide more interest rate cuts this year when they end the March policy meeting on Wednesday. In December, Fed officials collectively guided two interest rate cuts in 2025.
The Fed is certain to keep interest rates steady in the range of 4.25%-4.50% for the second time in a row. Still, the central bank might turn slightly dovish on the monetary policy outlook amid easing inflationary pressures and deteriorating consumer confidence.
The United States (US) Consumer Price Index (CPI) data for February showed that the core inflation – which excludes volatile food and energy prices – rose by 3.1%, the lowest level seen since April 2021. Meanwhile, the preliminary Michigan Consumer Sentiment Index fell significantly lower at 57.9 in March against estimates of 63.1 and the former reading of 64.7.
Daily digest market movers: Pound Sterling ticks higher ahead of BoE policy decision, UK Employment
- The Pound Sterling is slightly higher against its major peers, with investors focusing on the Bank of England’s (BoE) interest rate decision on Thursday. Traders are increasingly confident that the BoE will keep borrowing rates steady at 4.5%, with a 7-2 vote split.
- BoE Monetary Policy Committee (MPC) members Catherine Mann and Swati Dhingra are expected to support an interest rate cut. Both officials voted for a larger-than-usual interest rate reduction of 50 basis points (bps) in the February policy meeting, while others favored a usual cut of 25 bps.
- Investors will also focus on BoE’s guidance on the monetary policy and how much US President Donald Trump-led tariff war could impact the United Kingdom’s (UK) economic outlook. Traders expect the BoE to cut interest rates two times more this year as the central bank halved its Gross Domestic Product (GDP) growth forecast for the year to 0.75% in the February policy meeting.
- On Monday, the Organisation for Economic Cooperation and Development (OECD) lowered its British growth forecast for this year to 1.4% from 1.7% projected in December amid global economic uncertainty due to US President Trump’s tariff agenda.
- On Thursday, investors will also focus on the UK labor market data for three months ending January before the BoE’s policy meeting.
Technical Analysis: Pound Sterling clings to gains around 1.3000
The Pound Sterling trades firmly near a fresh four-month high around the psychological level of 1.3000 against the US Dollar on Tuesday. The pair established above the 61.8% Fibonacci retracement, plotted from the late September high to the mid-January low, at 1.2930.
The long-term outlook of the GBP/USD pair remains bullish as it holds above the 200-day Exponential Moving Average (EMA), which is around 1.2700.
The 14-day Relative Strength Index (RSI) holds above 60.00, indicating that a strong bullish momentum is intact.
Looking down, the 50% Fibo retracement at 1.2767 and the 38.2% Fibo retracement at 1.2608 will act as key support zones for the pair. On the upside, the October 15 high of 1.3100 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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