The Pound Sterling (GBP) struggles for a decisive move in Monday’s European session as investors stay on the sidelines ahead of the interest rate decisions by the Federal Reserve (Fed) and the Bank of England (BoE), which will be announced on Wednesday and Thursday, respectively.
Investors see the BoE leaving interest rates unchanged at 5.25% as inflation is much higher than the desired rate of 2%. Market participants will keenly focus on the guidance for interest rates, namely clues about how long the BoE will keep interest rates high.
Currently, markets expec the BoE to begin reducing interest rates in its August policy meeting. However, policymakers have said that rate cuts would be appropriate only if they are convinced that inflation will sustainably rise to the 2% target.
The BoE needs to make a balancing act between high inflation and uncertainty over economic growth. The UK economy was in a technical recession in the second half of 2023, reporting contraction in the last two quarters. The nation grew by 0.2% in January but this is insufficient to confirm that the economy has returned to growth in the first quarter as a whole.
The Pound Sterling trades back and forth around 1.2730. The GBP/USD pair corrected to the 20-day Exponential Moving Average (EMA) near 1.2730 as the divergence with spot prices widened. The asset may find support near the breakout region of the Descending Triangle, which is around 1.2700. On the upside, a seven-month high at around 1.2900 will be a major barricade for the Pound Sterling bulls.
The 14-period Relative Strength Index (RSI) returns to the 40.00-60.00 range, indicating a sharp volatility contraction.
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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