- The Pound Sterling stabilizes against its major peers, except safe-haven assets, ahead of the BoE’s monetary policy on Thursday.
- The BoE is widely anticipated to cut interest rates by 25 bps to 4.5%.
- Investors await the US NFP data, which will influence expectations for the Fed’s monetary policy outlook.
The Pound Sterling (GBP) stabilizes against its major peers, except safe-haven currencies, on Thursday ahead of the Bank of England’s (BoE) monetary policy decision, which will be announced at 12:00 GMT. The BoE is almost certain to cut interest rates by 25 basis points (bps) to 4.5%, with an 8-1 vote split. Monetary Policy Committee (MPC) member Catherine Mann, who has been an outspoken hawk, is expected to support keeping interest rates unchanged at 4.75%.
The BoE is expected to announce an interest rate cut decision in an attempt to revive labor demand amid stagnating economic growth. This would be the third interest rate cut by the BoE in its current policy-easing cycle, which started at the August 2024 policy meeting.
United Kingdom (UK) employers have tempered the pace of hiring after Chancellor of the Exchequer Rachel Reeves announced an increase in employers’ contributions to National Insurance (NI). The last three employment readings suggest the labor force rose at a declining pace.
The UK Gross Domestic Product (GDP) growth remained flat in the third quarter and in the October-November period.
Investors will pay close attention to BoE Governor Andrew Bailey’s press conference after the policy decision to get cues about the inflation outlook and the monetary policy guidance.
Inflationary pressures in the UK decelerated at a faster-than-expected pace in December. Still, analysts at Citi expect an uptick in inflation ahead due to a sharp increase in wage growth and a reversal in energy prices.
Meanwhile, traders are pricing in a 56 bps interest rate reduction for the entire year after a quarter-to-percent cut on Thursday.
Daily digest market movers: Pound Sterling falls against USD as latter gauges temporary support
- The Pound Sterling ticks lower to near 1.2480 against the US Dollar (USD) in Thursday’s European session. The GBP/USD pair edges lower as the US Dollar strives to gain ground ahead of the United States (US) Nonfarm Payrolls (NFP) data for January, which will be released on Friday.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, finds a temporary support near 107.30 after a three-day sell-off from the two-week high near 110.00.
- The official United States (US) employment data is expected to drive market speculation about how long the Federal Reserve (Fed) will hold interest rates at their current levels. Last week, Fed Chair Jerome Powell said that they would make monetary policy adjustments only after seeing “real progress in inflation or at least some weakness in the labor market” after the central bank left interest rates unchanged in the range of 4.25%-4.50%.
- According to the CME FedWatch tool, the Fed is expected to announce its next interest rate cut in June’s policy meeting.
- The US Dollar witnessed a sharp sell-off in the first three trading days of the week as fears of a global trade war receded. Investors expect the trade war to remain between the US and China as the latter retaliated to US President Donald Trump’s imposition of 10% tariffs with 15% levies on Coal and Liquified Natural Gas (LNG) and 10% on Crude Oil, farm equipment and some autos. Meanwhile, President Trump suspended 25% tariff orders on Canada and Mexico for 30 days.
Technical Analysis: Pound Sterling struggles below 1.2500
The upside move in the Pound Sterling against the US Dollar has paused after rising above the psychological figure of 1.2500, which also coincided with the zone where the 50-day Exponential Moving Average (EMA) wobbles.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sideways trend.
Looking down, the January 13 low of 1.2100 and the October 2023 low of 1.2050 will act as key support zones for the pair. On the upside, the December 30 high of 1.2607 will act as key resistance.
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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