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- Pound Sterling trades in a tight range ahead of data-packed week
Pound Sterling trades in a tight range ahead of data-packed week
- The Pound Sterling is stuck in a tight range ahead of the UK labor market, US CPI data.
- The UK wage growth data will provide fresh cues about the inflation outlook.
- The broader market sentiment remains upbeat as hopes for Fed rate cuts in June remain firm.
The Pound Sterling (GBP) consolidates in a tight range around 1.2850 in Monday’s European session as investors stay on the sidelines in a data-packed week. The GBP/USD pair trades sideways ahead of the United Kingdom Employment and monthly Gross Domestic Product (GDP), which will be published on Tuesday and Wednesday, respectively.
UK labor market data for the three months ending in January will give clues about job growth and wage growth momentum, which has been a major driving factor in stubborn inflationary pressures. Persistent wage growth could push back market expectations for Bank of England (BoE) rate cuts to the August meeting. BoE policymakers said that inflation is expected to come down to the 2% target by summer, but that it could flare up again afterwards.
Outside the UK, the Pound Sterling will be impacted by the market sentiment, which will be guided by the United States Consumer Price Index (CPI) data for February, to be released on Tuesday. Hot inflation data could dent firm expectations for the Federal Reserve (Fed) reducing interest rates in June. Prospects for a Fed rate cut in June remain firm as the US Nonfarm Payrolls (NFP) report for February indicated that labor market conditions are cooling. The data showed that, while hiring by US employers remained strong, the Unemployment Rate rose and wage growth softened.
Daily digest market movers: Pound Sterling consolidates ahead of busy UK economic calendar
- The Pound Sterling trades back and forth in a confined range around 1.2850 after a strong rally as investors await fresh guidance on Bank of England interest rates.
- The BoE is expected to reduce interest rates in the August meeting after tightening its policy stance for more than two years. However, the wage growth data for the three months ending in January, to be released on Tuesday, could influence market expectations for rate cuts.
- Investors anticipate that wage growth excluding bonuses was steady at 6.2%. In the same period, Average Earnings including bonuses are forecast to have grown at a slightly slower pace of 5.7% against the former reading of 5.8%. Sticky wage growth would dampen hopes of early rate cuts by the BoE.
- BoE policymakers have been warning that wage growth remains a major barrier to progress in consumer price inflation declining towards the 2% target. Wage growth remains almost double what is required to be consistent for inflation to return to target. Strong wage growth momentum has been feeding inflation particularly in the services sector, where prices accelerated in the November-January period.
- Apart from the labor cost growth data, investors will also focus on the broader labor market data, as the BoE needs to achieve full employment and price stability to achieve the dual mandate. The Unemployment Rate for the three months ending January is expected to remain unchanged at 3.8%.
- Meanwhile, the broader market sentiment is upbeat as expectations for the Federal Reserve rate cut in the June policy meeting persist after the release of the US Employment report on Friday, which showed softening wage growth and a higher Unemployment Rate. The CME Fedwatch tool shows that there is a 57% chance that a rate-cut decision of 25 basis points (bps) will be announced in June.
Technical Analysis: Pound Sterling struggles to extend six-day winning streak
The Pound Sterling trades close to a seven-month high against the US Dollar near the round-level resistance of 1.2900. The pair struggles to extend its six-day winning spell on Monday as investors await fresh guidance on interest rates. The GBP/USD pair posted a strong upside move after breaking out from the Descending Triangle formation on the daily time frame. The near-term appeal is upbeat, and the 20-day Exponential Moving Average (EMA) at 1.2710 should act as a major cushion for the Pound Sterling bulls.
The 14-period Relative Strength Index reaches 70.00, exhibiting momentum towards the upside. No signs of overbought and divergence keep doors open for more 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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