Pound Sterling advances on improved market sentiment
|- Pound Sterling has stretched its recovery as the appeal of risky assets improves.
- UK recession fears have faded on prospects of early BoE rate cuts.
- Fed policymakers refuse to provide timing of rate cuts amid uncertainty over inflation.
The Pound Sterling (GBP) holds strength in the early New York session on Wednesday as the appeal for risk-perceived assets has improved significantly. The GBP/USD rebounds strongly despite increasing prospects of early rate cuts by the Bank of England (BoeE). After BoE Chief Economist Huw Pill, BoE Deputy Governor Sarah Breeden has also emphasized how long interest rates should remain restricted. Recent commentaries from BoE policymakers show that the central bank could begin reducing interest rates sooner.
The UK’s construction and service sectors have rebounded as prospects of rate cuts by the BoE have deepened amid easing price pressures. This has improved the confidence of business enterprises in the economic outlook.
The US Dollar has come under pressure despite the Federal Reserve (Fed) now expecting not to rush rate cuts amid a resilient United States economy. Fed policymakers continue to ignore discussions about the timing of rate cuts as the inflation situation is still uncertain due to robust labor market conditions and retail demand.
Daily Digest Market Movers: Pound Sterling jumps higher while US Dollar falls from nearly three-month high
- Pound Sterling has extended its upside above 1.2600 as the United Kingdom's economic prospects improve despite the Bank of England (BoE) maintaining interest rates in the restrictive trajectory.
- After robust Services PMI data, UK S&P Global/CIPS Construction PMI rose sharply to 48.8 vs. expectations of 47.3 and the prior reading of 46.8.
- UK construction companies have become more optimistic about fading recession risks and rate cuts by the BoE amid easing price pressures.
- Deepening prospects of loosening financial conditions and improving economic outlook have improved business optimism.
- The odds of early rate cuts by the BoE escalated after a dovish guidance on interest rates by Bank of England Chief Economist Huw Pill.
- Huw Pill said on Monday that the central bank is now focusing on “when” rather than “if” it will start lowering its benchmark interest rates. Pill added inflation indicators are far from endorsing the commencement of an easy policy but the underlying inflation is not needed to return to 2% for rate cuts.
- Also, Stephen Millard, a NIESR deputy director, said the good news for 2024 was that wages would continue to rise while inflation fell quickly towards the BoE's 2% target, probably allowing the central bank to start cutting interest rates in May, Reuters reported.
- For fresh guidance on interest rates, investors will keenly observe how the labor market and service inflation will shape up.
- The US Dollar Index (DXY) has come under pressure despite investors losing conviction over rate cuts by the Federal Reserve in May.
- As per the CME Fedwatch tool, traders see a 53% chance for a rate cut by 25 basis points (bps) in May, which has come down as policymakers push back expectations of early rate cuts.
Technical Analysis: Pound Sterling settles above 1.2600
Pound Sterling advances above the round-level resistance of 1.2600 as the risk appetite of the market participants is improving again. The GBP/USD pair recovers strongly after discovering buying interest near a seven-week low around 1.2500. The near-term outlook of the Cable is still downbeat as it is trading below the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.2664 and 1.2634 respectively.
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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