- The Pound Sterling trades near 1.3350 against the US Dollar, with investors awaiting the Fed’s monetary policy announcement.
- Investors expect the Fed to leave interest rates steady.
- A slowdown in the UK labor demand paves the way for more interest rate cuts by the BoE.
The Pound Sterling (GBP) trades cautiously near 1.3350 against the US Dollar (USD) during the European trading session on Wednesday as investors await the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near the new monthly high of 99.00 posted on Tuesday.
According to the CME FedWatch tool, bond markets are almost fully pricing in that the Fed will leave interest rates steady in the range of 4.25%-4.50%. This would be the fifth straight policy meeting in which the US central bank will hold borrowing rates at the current levels.
Investors will pay close attention to Fed Chair Jerome Powell’s press conference for fresh cues on the monetary policy outlook for the remainder of the year. At least two out of the 12 members of the Federal Open Market Committee (FOMC), Fed Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller, are expected to support lowering interest rates. Before the blackout period, both policymakers argued in favor of an interest rate reduction as early as this month, citing downside risks to the labor market.
On the contrary, other officials stated that there should be no rush for interest rate cuts as the impact of tariffs imposed by Washington on various imports has started feeding into prices. The Consumer Price Index (CPI) report for June also showed that prices of products that are largely imported in the US have increased partly due to the levies.
Daily digest market movers: Pound Sterling flattens against its peers
- The Pound Sterling trades almost flat against its major peers, except the Japanese Yen (JPY), on Wednesday. The British currency is expected to remain under pressure in the medium term as the Bank of England (BoE) is almost certain to cut interest rates in next week’s monetary policy meeting.
- Traders have become increasingly confident that the BoE will reduce its key borrowing rates on August 7 as United Kingdom (UK) labor market conditions have cooled down, following an increase in employers’ contributions to social security schemes.
- The latest survey from the Confederation of British Industry (CBI) showed on Monday that households’ spending has diminished due to a slowdown in the labor demand. The agency reported that retail sales declined for the tenth straight month in July. However, the pace of decline in retail sales was less severe than what was seen in June.
- In the US, investors will also focus on the preliminary Q2 Gross Domestic Product (GDP) and Personal Consumption Expenditure Price Index (PCE), and the ADP Employment Change data for July, which will be published during the North American session.
- The data is expected to show that the economy grew at 2.4% after contracting by 0.5% in the first quarter of the year. Meanwhile, core PCE inflation, which is the Fed’s preferred inflation gauge, is expected to have grown at a more moderate pace of 2.4% compared to the 3.5% increase seen in the previous quarter.
- Economists expect the US private sector to have added 78K fresh workers in July after the 33K decline seen in June.
Technical Analysis: Pound Sterling wobbles above 1.3300
The Pound Sterling strives to hold the immediate support of 1.3300 against the US Dollar on Wednesday. The near-term trend of the GBP/USD pair remains bearish as the 20-day Exponential Moving Average (EMA) slopes downwards to near 1.3473.
The formation of a Head and Shoulder (H&S) chart pattern also suggests that the overall trend is bearish. The neckline of the H&S formation is plotted near 1.3413.
The 14-day Relative Strength Index (RSI) oscillates below 40.00, indicating that the 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 1 high around 1.3790 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.
