Pound Sterling hovers around monthly lows on dismal market sentiment
- The Pound Sterling dips as investors expect the BoE to cut rates sooner than expected.
- BoE Bailey said market expectations for two or three rate cuts this year are not unreasonable.
- The main event for this week will be the US core PCE price index data for February.
The Pound Sterling (GBP) falls to 1.2600 in Wednesday’s European session as investors expect that the Bank of England (BoE) will start reducing interest rates sooner than previously anticipated. To a certain extent, the BoE has turned dovish on the interest rate outlook as the United Kingdom’s inflation is softening.
In a recent interview with the Financial Times, BoE Governor Andrew Bailey said market expectations for rate cuts this year are not unreasonable. About the inflation outlook, Bailey said "We are not seeing a lot of sticky persistence."
The GBP/USD faces downside pressure from dismal market sentiment. Investors turn cautious ahead of the United States core Personal Consumption Expenditure price index (PCE) data for February, which will be published on Good Friday. The US Dollar Index (DXY), which values the Greenback against six foreign currencies, rises to 104.40.
Daily digest market movers: Pound Sterling is down as US Dollar rebounds
- The Pound Sterling falls further to the crucial support of 1.2600 as the US Dollar rebounds sharply amid uncertainty ahead of the United States core PCE price index data for February. The Federal Reserve’s (Fed) preferred inflation measure could provide some cues about when the central bank could start reducing interest rates.
- Stubborn inflation and a strong economic outlook in the US could allow the Fed to delay its rate cut plans. The Fed’s latest dot plot, released last week, pointed to three rate cuts for this year, but a slower progress in inflation declining to the 2% target could also result in fewer cuts.
- Apart from the risk-off mood, market expectations for the Bank of England’s interest rate outlook will drive the next move in the Pound Sterling. A sharp decline in the UK’s inflation data for February has uplifted expectations for the BoE to begin reducing interest rates early in the June policy meeting. Before the release of the soft inflation data and slightly dovish interest rate guidance from the BoE, rate cuts were majorly expected starting from the August meeting.
- In its last meeting, the BoE was observed as slightly dovish as no policymaker voted for a rate hike for the first time since September 2021. Catherine Mann, who remains a hawk, dropped her rate hike call as she observed that consumers are reluctant to pay higher prices on services such as travel and hospitality, she said in an interview with Bloomberg. Mann added that firms are cutting working hours in times when more employment is required. She further added that the number of workers in the labor market will increase due to the government's cuts to social security rates.
- This week, the UK’s economic calendar is light. Investors will look for revised Q4 2023 Gross Domestic Product (GDP) estimates. Any significant change from preliminary estimates will influence the Pound Sterling. The preliminary estimates showed that the UK economy entered a technical recession in the second half of 2023 after contracting by 0.3% in the October-December quarter.
Technical Analysis: Pound Sterling slips to 1.2600
The Pound Sterling drops to near the round-level support of 1.2600. The GBP/USD pair falls after facing stiff resistance while extending the upside above the 1.2660 hurdle. The pair trades slightly higher than the 200-day Exponential Moving Average (EMA), placed around 1.2565. The asset would extend its downside if it drops below the 200-day EMA.
The 14-period Relative Strength Index (RSI) slips to near 40.00. If it dips below this level, a 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.