Pound Sterling extends losses on risk-off market mood
- The Pound Sterling faces selling pressure as the appeal for risk-sensitive assets fades.
- The UK economy grew as expected in January but fears of recession remain high.
- Going forward, investors will shift focus to the UK Inflation data for fresh guidance.
The Pound Sterling (GBP) declines in Friday’s European session as dismal market sentiment dampens the appeal of risk-sensitive assets. The GBP/USD pair refreshes a weekly low near 1.2730 as the US Dollar strengthens, driven by increasing expectations that the Federal Reserve (Fed) could keep interest rates unchanged in the range of 5.25%-5.50% in the June policy meeting.
The Cable is under pressure due to expectations that the Fed's first rate cut, a widely expected move for markets after high interest rates for more than two years, could be pushed back further down the summer. This would align the time frame of the Fed’s rate cut decision with that of the Bank of England (BoE), which is expected to start reducing interest rates from the August policy meeting.
Uncertainty over the United Kingdom's economic outlook may not allow BoE policymakers to keep interest rates higher for longer. The UK economy entered a technical recession in the second half of 2023, and despite January’s slight uptick, there is no solid indication that the worst is over for them.
Daily Digest Market Movers: Pound Sterling falls while USD Index looks set for positive weekly closing
- The Pound Sterling drops to 1.2730 as the market sentiment remains downbeat amid fears that the Federal Reserve would be reluctant to cut interest rates in the June policy meeting due to a string of stubborn inflation indicators.
- The US Dollar and bond yields soared after the United States Producer Price Index (PPI) data for February turned out more stubborn than expected. Producers tend to raise the prices of goods and services at their factory gates when they experience supply chain disruptions or anticipate higher consumer spending. In February, higher gasoline and food prices boosted producer prices. The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, rose to 103.40 after the data release.
- This week, the Pound Sterling remains on the back foot. The 0.2% UK economic growth in January, which was expected by markets, fails to offset the impact of weak Employment data for the three months ending January, also released earlier this week. The UK economy has returned to growth after contracting in the second half of 2023. However, the economy needs to report an expansion as a whole in the first quarter to prove that the technical recession was shallow.
- Going forward, the major trigger for the Pound Sterling will be the UK’s inflation data for February, which will be published on Wednesday, a day before the Bank of England interest-rate decision. The impact of slowing wage growth, which has been feeding service inflation, could be visible in the Consumer Price Index (CPI) data. Stubborn service inflation has been a key driver of high inflationary pressures.
- The inflation data will influence market expectations for BoE rate cuts, which are currently pointing to the August policy meeting. According to a Reuters poll, the central bank will start cutting borrowing costs in the third quarter, although 40% of economists saw an earlier trim.
Technical Analysis: Pound Sterling declines towards 20-EMA
The Pound Sterling prints a fresh weekly low near 1.2730 against the US Dollar. The GBP/USD pair corrects significantly from its seven-month high near 1.2900. The pair is an inch higher than the 20-day Exponential Moving Average (EMA), which trades around 1.2725.
The 14-period Relative Strength Index (RSI) has dropped into the 40.00-60.00 range, indicating that the bullish momentum has faded.
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.