- The Pound Sterling remains firm near 1.3400 against the US Dollar as the Fed is expected to cut interest rates again by 50 bps in November.
- BoE Governor Andrew Bailey sees a gradual decline in interest rates.
- Investors await the US PCE inflation data for August on Friday for fresh clues on the Fed’s interest rate prospects.
The Pound Sterling (GBP) edges lower in Wednesday’s London session but manages to cling to recent gains against the US Dollar (USD) near the round-level figure of 1.3400. The GBP/USD pair remains firm as the US Dollar extends its downside to near the yearly low on expectations that the Federal Reserve (Fed) could deliver one more big interest rate cut in one of the two policy meetings remaining this year.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near 100.20.
Last week, the Fed started the policy-easing cycle with a 50-basis points (bps) reduction in interest rates to the range of 4.75%-5.00%, with the aim of reviving labor market strength. The Fed also gained confidence that inflation will sustainably return to the bank’s target of 2%. Out of the 12 members-led Federal Open Market Committee (FOMC), only Fed Governor Michelle Bowman supported a gradual beginning of the rate-cut cycle with a standard 25 bps cut.
According to the CME FedWatch tool, the central bank is expected to reduce its key borrowing rates further by 75 bps in the remainder of the year, suggesting that there will be one 50 bps and one 25 bps rate cut. The 30-day Federal fund futures pricing data shows that the probability of the Fed reducing interest rates by a double dose of 50 bps in November has increased to 59% from 37% a week ago.
Going forward, investors will shift focus to the United States (US) core Personal Consumption Expenditures Price Index (PCE) data for August, the Fed’s preferred inflation gauge, which will be published on Friday. Economists estimate the core annual inflation measure to have accelerated to 2.7% from 2.6% in July.
Daily digest market movers: Pound Sterling remains broadly firm as BoE’s Bailey expects a gradual rate-cut cycle
- The Pound Sterling exhibits a mixed performance against its major peers on Wednesday. The outlook of the British currency remains firm as investors expect that the Bank of England (BoE) will lower interest rates gradually. BoE Governor Andrew Bailey said in an interview with Kent Messenger newspaper on Tuesday, “I do think the path for interest rates will be downwards, gradually.”
- The comments from Bailey suggested that he is confident about inflation sustainably returning to the bank’s target of 2%. When asked about where interest rates will settle, Bailey didn’t provide a specific neutral rate but assured that he did not expect them to return to historic lows as seen in times of pandemic.
- In the United Kingdom (UK), the annual headline inflation hovered near the bank’s target of 2% in the last three months. However, high inflation in the services sector has remained a major concern for BoE policymakers, for which they closely track the Service Consumer Price Index (CPI), which increased to 5.6% in August from 5.2% in July.
Technical Analysis: Pound Sterling holds strength near 1.3400
The Pound Sterling rises further to 1.3400 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher.
Earlier in September, the Cable strengthened after recovering from a corrective move to near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp increase after a breakout on August 21.
The 14-day Relative Strength Index (RSI) shifts above 60.00, suggesting an active bullish momentum.
Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support.
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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