The Pound Sterling (GBP) extends its downside below the psychological support of 1.2500 against the US Dollar (USD) during Wednesday’s London session. Due to the light economic calendar in the United Kingdom, the volatility in the GBP/USD pair all comes from the side of the US Dollar as the United States faces a data-packed week, starting with the Federal Reserve decision (Fed) later on Wednesday.
The Pound Sterling’s valuation will solely be impacted by expectations for interest-rate cuts by the Bank of England (BoE). Financial markets speculate that the BoE could opt to cut borrowing costs in the June or August meetings. Traders have priced in rate cuts soon as BoE Governor Andrew Bailey said he is confident that headline inflation will come down to 2% in April. In March, UK inflation stood at 3.2%.
The recent steep correction in the GBP/USD pair reflects uncertainty among investors ahead of the Fed interest rate decision, which will be announced at 18:00 GMT. The Fed is expected to maintain interest rates steady and to give hawkish rhetoric, as recent inflation data suggests persisting price pressures, making it difficult for policymakers to gain confidence that price growth will sustainably return to the 2% target. This scenario of higher interest rates in the US improves the appeal of the US Dollar and weighs on other currencies whose central banks are seen cutting rates earlier than the Fed.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, advances to a two-week high of around 106.50.
The Pound Sterling falls sharply against the US Dollar after failing to extend its upside above the crucial resistance of 1.2570. The GBP/USD pair also fails to sustain above the 20-day Exponential Moving Average (EMA) around 1.2510, indicating that the near-term outlook is still uncertain.
The neckline of the Head and Shoulders (H&S) pattern has acted as a strong barrier for the Pound Sterling bulls. On April 12, the Cable experienced an intense sell-off after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting 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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