GBP/USD slips after hitting year-to-date high past 100-day SMA
- UK Retail Sales beat expectations, rising 1.7% MoM in January.
- US S&P Global Services PMI drops into contraction, dragging Composite index lower.
- Traders price in fewer BoE rate cuts, supporting further GBP/USD upside.
GBP/USD registers losses on Friday during the North American session after testing the 100-day Simple Moving Average (SMA) at 1.2658. Good economic data from the United Kingdom (UK) pushed the pair towards year-to-date (YTD) highs of 1.2678 before stabilizing at current spot prices. The pair exchanges hands near 1.2660.
Pound stabilizes near 1.2660 after hitting YTD highs of 1.2678
S&P Global showed that business activity in the United States (US) weakened further, even though the February manufacturing PMI rose to 51.6, up from 51.2, exceeding forecasts. Nevertheless, the services index disappointed investors, falling into recessionary territory from 52.9 to 49.7, pushing the Composite index to 50.4 from 52.7.
In the UK, Retail Sales in January exceeded estimates of 0.3%, expanding 1.7% MoM. In the twelve months to January, they dipped from 2.8% to 1%, above the forecast of a 0.6% increase. Other data showed that S&P Flash PMIs came mixed, with the manufacturing index contracting while the services sector improved from 50.8 to 51.1.
UK data showing mixed readings would make the Bank of England’s (BoE) job more difficult. As the bank embarked on an easing cycle, inflation and wages rose. Consequently, further GBP/USD strength is seen after traders priced in no more than two interest rate cuts this year.
GBP/USD Price Forecast: Technical outlook
Given the backdrop, the drop in the GBP/USD pair could be seen as an opportunity for buyers to enter at a better price. However, a drop below 1.2600 shifts the bias slightly to the downside, as sellers would challenge 1.2549, ahead of testing the 50-day SMA at 1.2459.
Of note, the Relative Strength Index (RSI) is mixed, despite standing in bullish territory, and aims downwards. Therefore, expect a leg-down to the figure before buyers re-engage and push prices higher.
(This story was corrected on February 24 at 08:46 GMT to say that GBP/USD slips after hitting a year-to-date high, not a record high.)
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, also known as ‘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.
Author
Christian Borjon Valencia
FXStreet
Christian Borjon began his career as a retail trader in 2010, mainly focused on technical analysis and strategies around it. He started as a swing trader, as he used to work in another industry unrelated to the financial markets.
