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27.08.2024, 07:57

Pound Sterling trades sideways as investors look for fresh Fed, BoE interest rate cues

  • The Pound Sterling trades sideways around 1.3200 against the US Dollar, with investors focusing on the US core PCE inflation data for July.
  • Fed’s Mary Daly kept doors open for an aggressive policy easing if the US labor market deteriorates.
  • British shop price inflation slowed sharply in August.

The Pound Sterling (GBP) clings to gains near the round-level figure of 1.3200 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair is sort of taking a breather after last week’s sharp increase, with investors looking for fresh cues about the likely size of the Federal Reserve (Fed) interest rate cut in September. 

According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that the probability of a 50-basis-points (bps) interest-rate reduction in September is 28.5%, while the rest favors a smaller cut of 25 bps. The tool unambiguously shows that the Fed’s return to policy normalization is fully priced in by traders, a move that has kept the US Dollar on the back foot for more than a week.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, exhibits a subdued performance below the immediate resistance of 101.00.

On Monday, San Francisco Fed Bank President Mary Daly emphasized the need to cut interest rates in September. Daly supported a 25 bps interest rate cut but also left doors open for a bigger one if the labor market deteriorates, she said in an interview on Bloomberg.

The confidence of investors that the Fed will begin reducing interest rates from September rose after Fed Chair Jerome Powell said that the time has come for policy to adjust in his speech at the Jackson Hole (JH) Symposium on Friday. Jerome Powell also showed concerns over easing labor market conditions and vowed to support it.

This week, investors will keenly focus on the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. Annual core PCE is estimated to have accelerated to 2.7% from the prior release of 2.6%, with monthly figures seen growing steadily by 0.2%. Before that, the US economic calendar will offer on Tuesday the release of the  S&P/Case-Shiller Home Price Indices for June and The Conference Board’s gauge of Consumer Confidence for August.

Daily digest market movers: Pound Sterling outperforms major peers

  • The Pound Sterling exhibits strength against its major peers, except Asia-Pacific currencies, on Tuesday. The British currency capitalizes on upbeat market sentiment and an improving economic outlook in the United Kingdom (UK). Economic prospects improved after the flash S&P Global/CIPS PMI showed that activity in both the manufacturing and the service sectors rose at a faster-than-expected pace in August.
  • Declining bets favoring another interest-rate cut by the Bank of England (BoE) in September have also improved the Pound Sterling’s appeal. The possibility of this scenario is low as BoE officials expect inflation to rise again even as price pressures in the pipeline seem to be abating.
  • British shop prices declined in August for the first time since October 2021, data from the British Retail Consortium (BRC) reported on Tuesday shows. Prices of non-food goods dropped by 1.5% due to slower summer clothes sales, the biggest fall in three years. Food prices rose at a slower pace of 2.0%, the smallest rise since November 2021, down from 2.3% in July.
  • A slowdown in the shop price inflation is unlikely to increase expectations of BoE interest rate cuts in September as officials are still concerned about sticky price pressures in the service sector due to wage pressures. However, it could boost speculation for another rate cut before the year ends.

Technical Analysis: Pound Sterling consolidates near 1.3200

The Pound Sterling turns sideways after posting a fresh two-an-a-half-year high of 1.3200 against the US Dollar. The GBP/USD pair strengthened after delivering a breakout of the Rising Channel chart formation on the weekly time frame. If bullish momentum resumes, the Cable is expected to extend its upside towards the February 4, 2022, high of 1.3640. 

The upward-sloping 20-week Exponential Moving Average (EMA) near 1.2766 suggests a strong upside trend.

The 14-period Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting a strong upside momentum. Still, it has reached overbought levels at around 70.00, increasing the chances of a corrective pullback. On the downside, the psychological level of 1.3000 will be the crucial support for the Pound Sterling bulls. 

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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