Pound Sterling holds strength near 1.2700 although US Dollar stabilizes
- The Pound Sterling consolidates slightly below 1.2700 as the focus shifts to UK inflation data.
- Investors expect that the BoE could start reducing interest rates in the June or August meeting.
- Fed’s hawkish stance on interest rates boosts US Dollar’s recovery.
The Pound Sterling (GBP) turns sideways in Friday’s London session after posting a fresh monthly high at 1.2700 on Thursday. The GBP/USD pair struggles to extend upside as investors shift focus to the United Kingdom Consumer Price Index (CPI) data for April, which will be published on Wednesday.
The UK inflation data will provide fresh cues about the interest rate outlook. Investors remain divided between the June and the August meeting about when the Bank of England (BoE) could start reducing interest rates.
April’s inflation data is expected to significantly influence the next move in the Pound Sterling as BoE Governor Andrew Bailey said after the release of the March’s CPI data on April 17, “Inflation in the UK will fall near its 2% target next month” and has declined roughly in step with the BOE’s forecast in February. Bailey added, “I expect that next month's number will show quite a strong drop because we have a particularly unique energy to household energy pricing system in the UK,” Bloomberg reported.
Daily digest market movers: Pound Sterling upside stalls as US Dollar rebounds
- The Pound Sterling’s rally to near the round-level resistance of 1.2700 stalls as the market sentiment turns slightly cautious. Federal Reserve (Fed) policymakers push back market expectations for rate cuts despite an expected decline in the United States (US) inflation data for April.
- A slew of Fed policymakers lined up to speak on the interest rate outlook on Thursday. Their commentary suggested that the current interest rate framework is optimal in the present scenario. Policymakers suggested that a one-time decline in inflation figures is insufficient to give them confidence that the disinflation process has continued again after stalling in the first quarter of this year.
- Hawkish commentaries from Fed policymakers have negatively impacted speculation for Fed rate cuts, for which investors expect that the central bank will choose the September meeting as the earliest point. The CME FedWatch tool shows that the probability of interest rates declining from their current levels in September has come down to 68% from 73% recorded after the release of the inflation data.
- The Fed maintaining a stance of higher interest rates for longer has offered some relief to the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to 104.66 after posting a fresh monthly low near 104.00 on Thursday but is still on track to close the week in negative.
- Meanwhile, investors’ concerns over US labor market strength deepened further after the Department of Labor showed on Thursday that Initial Jobless Claims for the week ending May 10 were higher-than-expected. The number of individuals claiming jobless benefits for the first time was 222K, above estimates of 220K but lower than the prior reading of 232K, the highest level in eight months.
Technical Analysis: Pound Sterling trades close to 61.8% Fibo retracement around 1.2670
The Pound Sterling advances to the 61.8% Fibonacci retracement (plotted from the March high at around 1.2900 to the April low at 1.2300) at 1.2670 on a daily timeframe. The GBP/USD pair could extend its upside after a decisive break above the round-level resistance of 1.2700.
On the downside, 50-day and 200-day Exponential Moving Averages (EMAs), which trade around 1.2565 and 1.2536, respectively, will be the major support zones for the Pound Sterling
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.