The Pound Sterling (GBP) trades lacklustre in Monday’s London session but holds the crucial support of 1.2700 against the US Dollar (USD). The GBP/USD pair turns sideways at the beginning of a data-packed week in the United States (US), which will kick off with the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) data for May, to be published at 14:00 GMT.
Economists expect the PMI, which gauges factory activity, to rise to 49.8 from the prior reading of 49.2 but to remain below the 50.0 threshold that separates expansion from contraction. However, the preliminary S&P Global PMI report for May – another survey that also gauges activity in the US manufacturing sector – showed that the PMI rose to a two-month high at 50.9 from April’s reading of 50.0.
In the PMI report, investors will also focus on other subcomponents, such as the New Orders and Price Paid indexes, as they give insights into the demand outlook and change in input prices of the manufacturing sector. Analysts take both indexes as good leading indicators of upcoming inflation pressures.
Later this week, investors will keenly watch the US ISM Services PMI and the official Employment data to be published on Wednesday and Friday, respectively. Meanwhile, there aren’t any top-tier events in the United Kingdom (UK) economic calendar.
The Pound Sterling trades sideways near 1.2750. The GBP/USD pair exhibits a sharp volatility contraction as it trades in a Descending Triangle formation in the 4-hour time frame. The downward-sloping border of the above-mentioned chart pattern is plotted from May 28 high near 1.2800, while the horizontal support is marked from May 24 low at 1.2676.
The 50-day Exponential Moving Average (EMA) trades closely to the spot price near 1.2720, suggesting a sideways trend.
Meanwhile, the 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating indecisiveness among market participants.
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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