- The Pound Sterling holds gains near 1.2700 amid cheerful market sentiment.
- UK’s steady wage growth keeps BoE rate-cut context uncertain.
- An expected decline in the US CPI strengthens Fed rate-cut bets for September.
The Pound Sterling (GBP) turns sideways after posting a fresh monthly high near 1.2700 against the US Dollar (USD) in Thursday’s London session. The near-term outlook of the GBP/USD pair is upbeat as uncertainty over the Bank of England (BoE) rate-cut timing has deepened due to stubborn United Kingdom (UK) wage growth. This is a favorable scenario for the Pound Sterling.
UK Average Earnings grew steadily in the three months ending March, raising concerns over progress in inflation declining to the desired rate of 2%. High wage growth feeds service inflation, which has remained a major barrier to progress in the disinflation process.
By the weekend, the UK economic calendar has noting much to offer. Therefore, investors will keenly watch the commentary on interest rates from BoE policymakers: Megan Greene and Catherine Mann, who are scheduled to speak on Thursday and Friday, respectively.
Daily digest market movers: Pound Sterling holds on gains amid uncertainty over BoE rate-cuts
- The Pound Sterling trades close to the round-level resistance of 1.2700 against the US Dollar. The GBP/USD pair remains firm as the market sentiment is quite bullish amid strong speculation that the Federal Reserve (Fed) will start lowering interest rates from the September meeting. S&P 500 futures post gains in the European session, exhibiting an improvement in investors’ risk-appetite.
- The CME FedWatch tool shows that the probability of interest rates declining from their current levels in the September meeting has increased to 73% from 69% recorded a week ago. Invertors’ confidence in Fed rate cuts has improved due to soft United States inflation report, easing labor market conditions and stagnant Retail Sales data for April.
- On Wednesday, the US Bureau of Labor Statistics (BLS) reported that annual headline and core Consumer Price Index (CPI) grew at a slower pace of 3.4% and 3.6%, respectively as expected. Fed policymakers mainly focus on the core inflation data for decision-making on interest rates. Though the inflation measure is almost double the required rate of 2%, an expected decline in price pressures has increased investors’ confidence that inflationary pressures will sustainably return to the desired rate of 2%.
- Retail Sales data, a leading indicator of consumer spending that also provides cues about the outlook on inflation, remained unchanged in April but was expected to rise by 0.4%. This has suggested that the inflation outlook has softened.
- Going forward, the next move in the US Dollar will be guided by Fed policymakers’ commentary on the interest rate guidance, with Fed Vice Chair for Supervision Michael Barr, Fed Bank of Philadelphia President Patrick Harker, Fed Bank of Cleveland President Loretta Mester and Fed Bank of Atlanta President Raphael Bostic scheduled to speak on Thursday.
- On the economic data front, investors will focus on the Initial Jobless Claims data for the week ending May 10, which are estimated to have declined to 220K. Last week, individuals claiming jobless benefits were most in eight months at 231K and weighed heavily on the US Dollar.
Technical Analysis: Pound Sterling retraces 61.8% losses to 1.2700
The Pound Sterling retraces 61.8% of its losses recorded from a 10-month high around 1.2900 marked on March 8. Near and long-term outlook of the GBP/USD pair has turned bullish as it climbs above the 20-day and 200-day Exponential Moving Averages (EMAs), which trade around 1.2565 and 1.2536, respectively.
The 14-period Relative Strength Index (RSI) has shifted into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.
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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Source: Pound Sterling clings to gains near 1.2700 on firm Fed rate-cut prospects
