Pound Sterling stays on the back foot against US Dollar as traders trim Fed rate cut bets
- The Pound Sterling struggles to hold the immediate low around 1.3200 against the US Dollar as traders pare Fed’s interest-rate cut bets.
- Economists expect the BoE to cut interest rates next week.
- Investors await the US Nonfarm Payrolls and ISM Manufacturing PMI reports for July.
The Pound Sterling (GBP) holds onto losses near an almost 11-week low at around 1.3200 against the US Dollar (USD) during the European trading session on Friday. The GBP/USD struggles to gain ground as the US Dollar trades firmly, with traders paring bets supporting interest rate cuts by the Federal Reserve (Fed) in the September policy meeting.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near a fresh two-month high around 100.00.
According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September meeting has fallen to 39.2% from the 58.4% seen a week ago.
A slew of factors have contributed to this quick retracement of expectations that the Fed will lower rates in September. First, recent economic data , including the stronger-than-expected United States (US) Q2 Gross Domestic Product (GDP) growth and June’s sticky core Personal Consumption Expenditure Price Index (PCE). Second, signals from Fed Chair Jerome Powell, who suggested that there is no rush for interest rate cuts
On Wednesday, the Fed left interest rates steady in the current range of 4.25%-4.50% for the fifth straight meeting. Jerome Powell hinted that monetary policy adjustments are currently inappropriate as “tariffs have exerted pressure on some goods”.
Daily digest market movers: Pound Sterling trades with caution against its peers
- The Pound Sterling trades cautiously against its peers on Friday, with investors shifting their focus to the Bank of England’s (BoE) monetary policy decision, which will be announced on Thursday.
- Market experts are predicting that the BoE will reduce interest rates by 25 basis points (bps) to 4% and will signal a pause as price pressures remain well-above the 2% target. “A one-and-done cut next week looks likely as the inflation is expected to hold above the BoE’s target of 2% through 2026 and 2027,” economists at Pantheon Macroeconomics said, Reuters reports.
- In June, the United Kingdom (UK) headline Consumer Price Index (CPI) came in at 3.6% on year, higher than expectations and the prior release of 3.4%.
- In Friday’s session, the GBP/USD pair will be influenced by US Nonfarm Payrolls (NFP) and the ISM Manufacturing Purchasing Managers’ Index (PMI) data for July, which will be published during North American trading hours.
- The US NFP data could significantly influence market expectations for the Fed’s monetary policy outlook. Economists expect the US economy to have added 110K fresh workers, lower than the 147K jobs created in June. The Unemployment Rate is seen ticking up to 4.2% from 4.1%.
- In the press conference on Wednesday, Jerome Powell stated that “downside risks to the labour market are certainly apparent”, however, until now labor-related indicators have shown broadly stable jobs market within a cooling trend.
- Meanwhile, the ISM Manufacturing PMI is expected to come in slightly higher at 49.5 from 49.0 in June, suggesting that activity in ther US factory sector continued to decline but at a moderate pace.
Technical Analysis: Pound Sterling weakens on H&S breakdown
The Pound Sterling trades vulnerable near 1.3200 against the US Dollar on Friday. The outlook of the GBP/USD pair has turned bearish as it has broken down below the neckline of a Head and Shoulders (H&S) chart pattern.
The downward-sloping 20-day Exponential Moving Average (EMA), near 1.3414, also suggests that the near-term trend is bearish.
The 14-day Relative Strength Index (RSI) oscillates well below 40.00, almost at oversold levels, indicating that a bearish momentum is intact.
Looking down, the May 12 low of 1.3140 will act as a key support zone. On the upside, the July 30 high near 1.3385 will act as a key barrier.
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.