Pound Sterling advances on improved risk sentiment, Fed policy eyed
- The Pound Sterling recovers as weak US ADP Employment data improves market mood.
- Focus remains over the Fed and the BoE monetary policy meetings.
- The Fed and the BoE are widely expected to leave interest rates unchanged.
The Pound Sterling (GBP) rebounds on Wednesday’s early New York session as the US Automatic Data Processing (ADP) has reported a slowdown in labor demand. US employers hired only 107K workers in January, which were significantly lower than expectations of 145K and the former reading of 158K. This has built pressure on the US Dollar.
Meanwhile, market brace for the US Federal Reserve’s (Fed) monetary policy meeting. Investors see the Fed leaving interest rates unchanged in the range of 5.25%-5.50%, shifting their focus towards any guidance about when the central bank will start cutting interest rates and at which speed. In its last monetary policy meeting, the Fed projected a 75-basis-points (bps) reduction in interest rates in 2024.
The GBP/USD pair trades broadly sideways, but a defined action is expected after the Fed and Bank of England (BoE) announce their first monetary policy decisions of 2024. The BoE is also expected to maintain the status quo for the fourth time in a row. Price pressures in the United Kingdom economy have peaked now, but investors lack confidence about inflation returning to the 2% target in a sustainable manner.
Apart from the Fed decision, market volatility is expected to increase this week as it will be followed by the Institute of Supply Management (ISM) Manufacturing PMI and Nonfarm Payrolls (NFP) data, which will be published on Thursday and Friday, respectively.
Daily digest market movers: Pound Sterling recovers sharply on downbeat US Employemnt data
- The Pound Sterling turns positive as the market mood improves on downbeat US private Employment data, ahead of the interest rate decision by the Federal Reserve.
- The Fed is anticipated to maintain status-quo, suggesting there is no rush for delivering a dovish signal as inflation in the United States economy is still far from the desired rate of 2%.
- The progress in inflation declining towards the 2% target has slowed as labor market conditions are strong, consumer spending is robust, and the economy is growing at a stronger pace.
- Further moves in the Pound Sterling will also be driven by the Bank of England’s monetary policy decision, which will be announced on Thursday.
- Like the Fed, the BoE is expected to deliver a steady interest rate decision for the fourth straight time, leaving interest rates unchanged at 5.25%.
- As an unchanged monetary policy decision is widely anticipated, market participants will majorly focus on the interest rate outlook.
- Unlike the Fed and the European Central Bank (ECB), BoE policymakers have not discussed the timing or scope of interest rate cuts in 2024. Therefore, discussions about rate cuts would be considered as bearish for the Pound Sterling.
- The reasoning behind BoE’s emphasis on keeping interest rates at the current levels is elevated inflation, which is higher in the UK in comparison with other members of the Group of Seven economies.
- Meanwhile, vulnerable economic growth could be a factor that will force BoE policymakers to discuss rate cuts.
- The Lloyds Bank Business Barometer rose to a two-year high of 44% amid hopes of softer inflation and interest rate cuts. The survey showed that businesses are planning to increase their workforce ahead.
Technical Analysis: Pound Sterling climbs above 1.2700
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Pound Sterling reclaims the round-level resistance of 1.2700 as market sentiment improves after weaker-than-projected US private payrolls data. The Cable is broadly stuck in a tight range between 1.2640-1.2775 during the last two weeks.
A descending triangle formation is visible on the daily timeframe, which indicates that investors are on the sidelines. The horizontal support of the aforementioned chart pattern is plotted from the December 21 low at 1.2612, while the downward-sloping trendline is placed from the December 28 high at 1.2827. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates a lackluster move ahead.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
