- The Pound Sterling experiences a whipsaw move after BoE Governor Bailey predicted four interest-rate cuts in 2025 as he expects the disinflation process to be embedded.
- Traders expect the BoE to keep interest rates steady at 4.75% at this month's meeting.
- Investors await a slew of US economic data and Fed Powell’s speech.
The Pound Sterling (GBP) surrenders some of its gains against its peers on Wednesday after Bank of England (BoE) Governor Andrew Bailey forecasted four interest-rate cuts in 2025 in an interview with Financial Times (FT).
Andrew Bailey reiterated that interest rates should be lowered gradually and emphasized the need to do more to bring inflation down even though the “disinflation process is well embedded”. When asked about the impact of tariffs by US President-elect Donald Trump on the United Kingdom (UK) inflation, Bailey said that these effects "are not straightforward to predict.”
Bailey didn’t guide about the likely interest rate action in the monetary policy meeting on December 19, but traders expect the BoE to leave interest rates unchanged at 4.75%.
Market expectations for the BoE to keep interest rates steady have been prompted by fears of United Kingdom (UK) inflation remaining persistent. UK’s inflation report for October showed that the annual core Consumer Price Index (CPI) – which excludes volatile items – accelerated to 3.3% and the service inflation rose to 5%. Inflation in the services sector is closely tracked by BoE officials for decision-making on the interest rate policy.
Daily digest market movers: Pound Sterling consolidates against US Dollar
- The Pound Sterling exhibits a subdued performance against the US Dollar (USD) in North American trading hours on Wednesday after facing selling pressure near 1.2700. The GBP/USD pair experienced whipsaw moves as the US Dollar clings to intraday gains even though the United States (US) ADP Employment Change data for November missed estimates marginally.
- The agency reported that the US private sector added fresh 146K jobs in November, significantly lower than 184K in October and marginally lower than expectations of 150K. The impact of the private sector employment data remained limited as investors await the US Nonfarm Payrolls (NFP) data on Friday, which will reflect the overall performance of the labor market.
- Investors will pay close attention to the NFP report as the Federal Reserve (Fed) started the policy-easing cycle in September amid worries over deteriorating labor demand, with high confidence over inflation remaining on a sustainable path to the bank’s target of 2%.
- Investors should be prepared for more volatility as Fed Chair Jerome Powell is scheduled to speak at the New York Times DealBook Summit at 18:45 GMT. Market participants will look for cues about whether the Fed will cut interest rates in the policy meeting on December 18. The probability for the Fed to cut interest rates by 25 basis points (bps) to 4.25%-4.50% is at 74%, while the rest favors leaving them unchanged at their current levels, according to the CME FedWatch tool.
- On the economic front, investors await the US ISM Services Purchasing Managers’ Index (PMI) data for November, which will be published at 15:00. Economists expect the Services PMI to have grown at a slower pace to 55.5 from the prior release of 56.0. A figure above 50.0 signals an expansion in economic activity.
Technical Analysis: Pound Sterling faces resistance from 20-day EMA
The Pound Sterling faces sellers against the US Dollar after a mean-reversion move to near the 20-day Exponential Moving Average (EMA) around 1.2710. The GBP/USD pair could fall further as its outlook remains bearish, with all short-to-long-term Exponential Moving Averages (EMAs) sloping downwards.
The 14-day Relative Strength Index (RSI) rebounds after turning oversold. However, the downside bias is still intact.
Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from March 2023 low near 1.1800. On the upside, the 200-day Exponential Moving Average (EMA) around 1.2830 will act as key resistance.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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