Pound Sterling holds above 1.2600 after release of Fed banking survey
- Pound Sterling vs US Dollar holds above 1.2600 after bank lending survey paints dim picture, lending USD a haven bid.
- The Pound benefits from monetary policy divergence with the US Dollar as elevated inflation suggests more hikes to come in the UK.
- Trend remains bullish suggesting higher highs to come as GBP/USD continues rising.
The Pound Sterling (GBP), the oldest currency in the world, trades above the 1.26 handle versus the US Dollar (USD) on Monday, ahead of key data this week in the form of US inflation data and the Bank of England (BoE) policy meeting later in the week.
The Pound Sterling is benefitting from a perceived monetary policy divergence with the US Dollar. Interest rates in the US may have peaked unlike in the UK where persistently high inflation coupled with robust data continues to suggest the BoE will need to do more to get inflation under control. Since global investors are always looking to park their money where it can earn the highest return, this favors GBP.
In the US the Fed has just released its bank Lending Officer Survey (Q1), which has shown a tightening in credit conditions following the banking crisis in March. The report suggests firms may find it more difficult to access credit in the future which could limit growth in the world's largest economy. The US Dollar seems to be holding up well after the report, despite the negative news, perhaps benefiting from a safe-haven bid.
From a technical perspective, GBP/USD continues to make new highs in a broadly bullish long-term uptrend. Given the old adage that “the trend is your friend” this advantages long over short holders.
GBP/USD market movers
- The US Dollar remains resilient after the release of the Federal Reserve's quarterly bank Lending Officer Survey which painted a picture of tightening credit conditions in the sector on growth and liquidity fears, possibly gaining support because of its safe-haven status.
- The Pound Sterling is profiting from outflows from the US Dollar as the US Federal Reserve (Fed) is seen as having probably reached peak interest rates in the current hiking cycle, whereas strong inflationary tendencies in the UK suggest higher rates to come, including 25 bps at the Bank of England (BoE) meeting on Thursday.
- With data continuing to show UK inflation above 10% for the seventh consecutive month and robust PMI data, as well as a recent uptick in house prices, inflationary forces in the UK do not look like they are about to ebb away.
- Next Thursday’s Bank of England (BoE) monetary policy meeting may reveal the BoE’s intent regarding future policy trajectory and could cause volatility in Pound Sterling pairs. If the BoE is particularly hawkish it will highlight this divergence with the Fed and result in increased flows to Pound Sterling.
- The poor performance of the Conservative government in local elections suggests a high chance the party will lose the next general election. The Pound Sterling declined to historic lows under the stewardship of the previous Prime Minister Lizz Truss and her Chancellor Kwazi Kwarteng, which caused a loss of faith in the Conservative party as a safe pair of hands when it comes to the economy.
- UK S&P Global Services PMI out on Thursday showed a higher-than-expected result of 55.9 versus the 54.9 no-change forecast. Construction PMI out on Friday also beat expectations, coming out at 51.1 versus the 50.7 of the previous month. This suggests continued inflationary pressures.
- The US Dollar continues to suffer from banking crisis fears in the US after the shares of two more regional banks, PacWest and Western Alliance, fell 50% and 40% respectively last week, on fears they were next to topple.
- The US Dollar, nevertheless, gained a short-lived boost after the release of Nonfarm Payrolls on Friday which showed a higher-than-expected rise of 253K versus 179K forecast. Above-forecast gains in Average Hourly Earnings of 4.4% and a fall in the Unemployment Rate to 3.4% further supported the Greenback.
- The release of US Consumer Price Index (CPI) data for April on Wednesday, May 10, at 12:30 GMT, will provide further data for the Federal Reserve to base future policy decisions. Currently expectations are for CPI to gain by 0.4% MoM and 5% YoY. Core CPI is forecast to rise by 0.4% MoM and 5.5% YoY, and is the metric that has the greater impact because it takes out volatile food and fuel components from the calculation.
GBP/USD technical analysis: Uptrend extends
GBP/USD continues making new highs, most to 1.2668, extending the established uptrend that began at the September 2022 lows. The overall trend remains bullish, favoring Pound Sterling longs over shorts.
-638191505039867321.png)
GBP/USD: Daily Chart
The recent decisive break above the 1.2593 April 28 highs opens the door to further gains to come. The GBP/USD completed three consecutive bullish green days in a row when it broke through the April resistance highs, indicating a higher chance price will hold above the level and continue rising higher.
To the upside, key resistance levels lie close to the current market level at the May 2022 highs at 1.2665, then at the 100-week Simple Moving Average (SMA) situated at 1.2713, and finally at the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1.2758. All provide potential upside targets for the pair. Each level will need to be decisively breached to open the door to further upside.
A decisive break is characterized by either a strong green daily bar that breaks above the key resistance level in question, and closes near the day’s highs. Or alternatively, three consecutive green bars that break above the resistance level. Such insignia provide confirmation that the break is not a ‘false break’ or bull trap.
The Relative Strength Index (RSI) remains below the overbought level at 70 but is creeping higher in line with price, reaching the upper 60s at the time of writing. Monday’s new higher highs in price were accompanied by similar higher highs in RSI indicating there is no bearish divergence. This is a mildly supportive sign for GBP/USD and may be indicative of further gains to come.
Federal Rerserve FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Joaquin Monfort
FXStreet
Joaquin Monfort is a financial writer and analyst with over 10 years experience writing about financial markets and alt data. He holds a degree in Anthropology from London University and a Diploma in Technical analysis.
