Pound Sterling remains on backfoot as waned Fed rate cut hopes dent market mood
- The Pound Sterling struggles to recover against the US Dollar as Fed rate cut prospects for June and July faded.
- UK monthly GDP data for February will provide cues about the current state of the economy.
- The BoE is expected to start lowering interest rates earlier than the Fed.
The Pound Sterling (GBP) finds some demand in Thursday’s London session after an intense sell-off that dragged the Cable to a two-month low near 1.2520. The near-term appeal of the GBP/USD pair has weakened as the US Dollar strengthens after traders dialled back bets supporting rate cuts by the Federal Reserve (Fed) in the June and July policy meetings.
Persistently higher United States Consumer Price Index (CPI) and Nonfarm Payrolls (NFP) data for March suggested that the Fed may not opt for rate cuts in the near term as these could ramp up price pressures. Also, the Federal Open Market Committee (FOMC) Minutes for the March meeting, released on Wednesday, indicated that policymakers remain worried about the inflation readings for the first two months of the year.
The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, prints a fresh more than four-month high near 105.30.
Meanwhile, waned Fed rate cut expectations for the June and July meetings have deepened fears of a prolonged policy divergence between the Fed and the Bank of England (BoE). The BoE is anticipated to begin reducing interest rates in June as inflation in the United Kingdom has slowed steadily for the last two months. Also, slower economic growth projections and easing labor market conditions would boost expectations for the BoE to pivot to rate cuts sooner. This scenario bodes poorly for the Pound Sterling.
Daily digest market movers: Pound Sterling eyes more downside on dismal market mood
- The Pound Sterling trades above the psychological support of 1.2500. The currency remains on the back foot against the US Dollar as market sentiment turns risk-off after investors push back Federal Reserve rate cut expectations. S&P 500 futures have extended their downside in the European session after plunging almost 1% on Wednesday.
- Hot United States inflation data for March, combined with robust labor demand, forced traders to pare big bets supporting Fed rate cuts. Meanwhile, investors’ confidence in three rate cuts by the year-end has also waned, and they are now anticipating only two.
- The US CPI has risen by more than expected for straight three months, suggesting that the Federal Reserve will opt to continue to hold interest rates steady in the range of 5.25%-5.50%. Price pressures remained stubbornly higher in March due to a significant rise in gasoline prices, rentals, and insurance costs.
- On the United Kingdom front, the monthly Gross Domestic Product (GDP) and factory data for February, which will be published on Friday, will guide the next move in the Pound Sterling. The monthly GDP data, which represents the state of the economy, are forecasted to have grown at a slower pace of 0.1% after expanding by 0.2% in January.
- Economists have forecasted that monthly Industrial Production data will remain stagnant after contracting by 0.2% in January. On year, Industrial Production is estimated to have increased 0.6% from the prior reading of 0.5%. Monthly Manufacturing Production is expected to have increased by a meagre 0.1% after remaining stagnant in January. On an annual basis, the economic data is anticipated to rise at a higher pace of 2.1% against the former reading of 2.0%.
- The UK factory data is a leading indicator of overall demand from domestic and overseas markets. Upbeat factory data would boost hopes of the UK economy coming out of the technical recession.
Technical Analysis: Pound Sterling sees downside near 1.2500
The Pound Sterling declines towards the psychological support of 1.2500 on risk-aversion mood. The GBP/USD pair dips to the 200-day Exponential Moving Average (EMA) at 1.2570, which remained a major support before the release of the hot US CPI data. The Cable could witness a sharp downside if it decisively breaks below the 1.2500 support.
The 14-period Relative Strength Index (RSI) hovers near 40.00. If it drops below this level, bearish momentum will trigger.
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, aka ‘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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