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14.12.2023, 08:03

Pound Sterling clings to gains ahead of BoE policy meeting

  • Pound Sterling recovers further ahead of the BoE’s monetary policy decision.
  • The BoE is expected to keep interest rates steady at 5.25% due to a weakening economy and falling inflation.
  • Discussion about interest-rate cuts could spoil the Pound Sterling’s recovery.

The Pound Sterling (GBP) extended recovery on Thursday, trading at 1.2650 against the US Dollar in the European morning session, capitalizing on the surprisingly dovish guidance from the US Federal Reserve (Fed). Power-pack action will continue for the Pound Sterling as the Bank of England (BoE) is set to announce its last monetary policy of 2023 at 12:00 GMT. 

Markets widely anticipate the BoE to hold interest rates steady at 5.25% for the third straight meeting due to deepening recession fears and easing inflation. However, policymakers could emphasize the need to maintain the “higher for longer” narrative in interest rates to ensure price stability.

The shrinking UK economy has put UK Prime Minister Rishi Sunak’s promise of ramping growth in jeopardy as the economy is struggling to absorb the consequences of higher interest rates. This could dampen the outlook of GBP/USD ahead.

Daily Digest Market Movers: Pound Sterling capitalizes on risk-on mood

  • Pound Sterling holds onto gains, inspired by an unchanged interest rate decision from the Fed for the third time in a row along with a dovish guidance by Fed Chair Jerome Powell.
  • Further action in the Pound Sterling would be guided by the interest rate decision from the BoE, which will be announced at 12:00 GMT.
  • Investors see the BoE keeping interest rates unchanged at 5.25%for the third consecutive time, but markets also expect BoE members to support keeping interest rates “higher for longer” to ensure the achievement of price stability.
  • Easing price pressures, falling pay growth, and a shrinking economy would be the supportive factors for maintaining a status quo by the BoE.
  • In the three months to October, earnings excluding bonuses grew at a slower pace of 7.3% against expectations of 7.4% and the former reading of 7.8%. Wage growth is slowing but it is still high. 
  • UK’s headline inflation has sharply declined to 4.6% in October. 
  • Monthly Gross Domestic Product (GDP) contracted 0.3% in October, more than the 0.1% forecasted by markets.  This is the first contraction since July. The Office for National Statistics (ONS) attributed exceptionally wet weather to the decline in GDP. 
  • A significant fall in Manufacturing and Industrial Production has raised concerns of a potential recession in the UK economy.
  • With a sharp decline in the UK’s economic activity, BoE policymakers are expected to follow the footprints of the Fed and will discuss cutting interest rates in 2024.
  • UK Chancellor Jeremy Hunt said that a sharp impact of higher interest rates on the economy was inevitable. 
  • The market mood favors risk-perceived assets as Jerome Powell remained surprisingly dovish while guiding further monetary policy action on Wednesday.
  • The Fed lowered their core Personal Consumption Expenditure (PCE) projections for 2024 and 2025 and hinted at three rate cuts in 2024. 
  • A “soft landing” scenario from the Fed is highly anticipated, which indicates that the economy has managed to tame inflation without any economic collapse and higher jobless rates.

Technical Analysis: Pound Sterling recovers to near 1.2650

Pound Sterling clings to gains ahead of the interest rate decision by the BoE. The GBP/USD pair trades near a nine-day high of around 1.2650 after a sharp recovery from the psychological support of 1.2500.

On a broader note, more strength in the Pound Sterling would allow the GBP/USD pair to re-test November’s high around 1.2733, which coincides with the 61.8% Fibonacci retracement. The 20-day Exponential Moving Average (EMA) at 1.2557 is expected to continue to provide support to the Pound Sterling bulls.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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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