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- Pound Sterling trades sideways ahead of BoE Mann’s speech
Pound Sterling trades sideways ahead of BoE Mann’s speech
- Pound Sterling remains inside Wednesday’s trading range amid an absence of fresh economic indicators.
- Persistent UK inflation would allow the BoE to deliver rate cuts later than other G-7 economies.
- The USD index turns lackluster after a corrective move as investors digest hawkish rhetoric from Fed policymakers.
The Pound Sterling (GBP) trades back and forth in a narrow range in Thursday’s European session due to a lack of fresh economic triggers for a decisive move. The GBP/USD pair turns quiet as traders await commentary from Bank of England (BoE) policymaker Catherine Mann for more guidance on future interest rates. If interest rates remain high in the UK compared to counterparts, GBP will likely be bullish as higher interest rates tend to attract greater foreign capital inflows.
On Wednesday, BoE Deputy Governor Sarah Breeden joined Chief Economist Huw Pill and said that the central bank is now focusing on the length of time that interest rates are required to remain at current levels.
In the last monetary policy statement, BoE Governor Andrew Bailey also said the longevity of higher interest rates depends upon upcoming data.
Apparently, BoE policymakers are gradually considering exiting from ultra-hawkish interest rates. However, the time period required for shifting to an easy monetary policy by the BoE is likely to be much longer than the Federal Reserve (Fed) and the European Central Bank (ECB) due to significant differences in wage growth momentum.
The Pound Sterling is expected to face volatility as BoE policymaker Catherine Mann is scheduled to speak at 15:00 GMT on Thursday. Mann is expected to maintain the hawkish rhetoric as she was one of the two of nine policymakers who voted for an interest rate hike by 25 basis points (bps) in the monetary policy meeting held on February 1.
Daily Digest Market Movers: Pound Sterling juggles in a tight range amid quiet market mood
- Pound Sterling oscillates in a tight range, slightly above 1.2600, as investors seek meaningful guidance over when and how much the Bank of England (BoE) will reduce interest rates this year.
- After a series of declines in price pressures, BoE policymakers are gradually leaning towards an expansionary policy stance.
- On Wednesday, BoE Deputy Governor Sarah Breeden highlighted strong wage growth momentum as a factor feeding price pressures.
- Sarah Breeden said inflationary pressures in the United Kingdom economy are still persistent but are well contained within the BoE’s forecast, making her less concerned about further policy tightening.
- Breeden added the focus of Monetary Policy Committee (MPC) members has now shifted to how long interest rates are needed to remain at restricted levels.
- Breeden further added that the central bank will focus on how pay growth and aggregate demand evolve ahead, allowing them more time to gain confidence about when inflation will return to the 2% target.
- Meanwhile, the US Dollar Index (DXY) is stuck in a tight range around 104.00.
- Federal Reserve policymakers are avoiding speculation over the timing of interest rate cuts, emphasizing keeping restrictive interest rates for longer until they get greater confidence that inflation will return to the 2% target.
- Investors see no offering of timing over rate cuts from the Fed, forcing them to shift to the sidelines.
- Next week, the release of the US inflation data for January is expected to provide a meaningful outlook on the future course of interest rates.
Technical Analysis: Pound Sterling hovers above 1.2600
Pound Sterling consolidates in a limited range around 1.2630 in Thursday’s European session. The Cable struggles to continue its two-day winning spell.
On a daily time frame, the GBP/USD pair has rebounded to near the 50-period Exponential Moving Average (EMA), which trades around 1.2640. The 20-period EMA has turned down, indicating a weak outlook in the very short-term. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a lackluster performance ahead.
Pound Sterling FAQs
What is the Pound Sterling?
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).
How do the decisions of the Bank of England impact on the Pound Sterling?
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.
How does economic data influence the value of the Pound?
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.
How does the Trade Balance impact the Pound?
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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