The Pound Sterling (GBP) fails to extend a slight recovery above the immediate resistance of 1.2930 against the US Dollar (USD) in Monday’s European session. The near-term outlook of the GBP/USD pair has become uncertain after a corrective move from an annual high of 1.3044 recorded last Wednesday. The Cable faced selling pressure as improved speculation for Donald Trump winning United States (US) presidential elections this year prompted the US Dollar’s appeal.
The expectations for Donald Trump increased as US President Joe Biden decided to endorse Vice President Kamala Harris to nominate herself as a contender for elections.
Investors expect Donald Trump's election victory to lead to a rise in trade restrictions that will increase inflation. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rose to 104.40 but corrected slightly in Monday’s London session.
Meanwhile, firm speculation that the Federal Reserve (Fed) will start reducing interest rates from the September meeting will limit the upside in the US Dollar.
This week, investors will keenly focus on a string of US economic data such as the preliminary S&P Global Purchasing Managers Index (PMI) for July, Q2 Gross Domestic Product (GDP), June’s Durable Goods Orders, and the Personal Consumption Expenditures (PCE) Price Index, the Fed's favorite inflation gauge, for June.
The Pound Sterling struggles to recover after correcting to near 1.2930 against the US Dollar. The GBP/USD pair weakens after facing a sell-off from a fresh annual high of 1.3044 on Wednesday.
The upward-sloping 20-day Exponential Moving Average (EMA) near 1.2850 suggests that the uptrend is intact. After turning slightly overbought, the 14-day Relative Strength Index (RSI) declines and is expected to find a cushion near 60.00.
On the upside, a two-year high near 1.3140 will be a key resistance zone for the Cable. On the other hand, the March 8 high near 1.2900 will be a key support for the Pound Sterling bulls.
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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