Pound Sterling breaks further as fading Fed rate-cut hopes strike risk appetite
- Pound Sterling remains under pressure as the Fed’s hopes for an early rate cut wane.
- The UK’s poor economic prospects could force the BoE to lean towards loosening policy.
- The S&P Global Services PMI came out better than expectations.
The Pound Sterling (GBP) continues to face the wrath of dismal market sentiment in the European session on Monday. The GBP/USD pair drops sharply as resilient United States Nonfarm Payrolls (NFP) data on Friday have dented expectations of a rate cut from the Federal Reserve (Fed) at March’s monetary policy meeting. The solid US job creation data came together with an unexpectedly robust wage growth, signaling that inflation pressures persist.
Meanwhile, the scenario for Bank of England (BoE) policymakers is becoming extremely complicated due to deepening fears of a technical recession in the United Kingdom economy. The UK Office for National Statistics (ONS) reported in its revised Q3 Gross Domestic Product (GDP) estimates that the economy contracted by 0.1%. The UK economy is expected to remain on the back foot as higher interest rates have deepened the cost-of-living crisis, forcing businesses to operate with lower capacity.
Daily digest market movers: Pound Sterling dives despite upbeat Sevices PMI
- The Pound Sterling fell to a near seven-week low of around 1.2600 as the appeal for risk-perceived assets weakened.
- The outlook for risk-sensitive assets has worsened as the upbeat United States employment data forced traders to pare Federal Reserve’s rate-cut bets.
- January’s US labor market data demonstrated a robust demand for workers and that employers offer higher wage growth to retain employees, indicating that businesses have a strong order book.
- As per the CME Group Fedwatch tool, a rate cut in March’s monetary policy meeting is unlikely. For May’s policy meeting, traders see a little above 57% chance for a rate cut by 25 basis points (bps) to 5.00%-5.25%.
- The Pound Sterling has come under severe pressure despite the Bank of England seeming more hawkish on the interest rate outlook than the Fed.
- Investors hope that a subdued economic performance and increasing geopolitical tensions could force BoE policymakers to cut interest rates earlier than expected.
- The United Kingdom's economy is on the brink of a technical recession. The economy witnessed a GDP contraction of 0.1% in the third quarter of 2023, and a subdued performance is anticipated in the final quarter.
- An absence of economic recovery in the UK would significantly impact the labor market.
- Out of nine member-led Monetary Policy Committee (MPC), BoE policymaker Swati Dhingra voted for a rate cut by 25 bps in last week's monetary policy meeting. In contrast, policymakers Catherine Mann and Jonathan Haskel supported a rate hike of similar size.
- The UK’s vulnerable economic prospects may force BoE policymakers to join Swati Dhingra and lean towards easing interest rates in upcoming meetings.
- The S&P Global has reported an upbeat Composite and Services PMI for January. The Composite PMI improved to 52.9, against expectations and the former reading of 52.5. Services PMI rose to 54.3 from the consensus and the prior release of 53.8.
Technical Analysis: Pound Sterling slumps to near 1.2550
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Pound Sterling falls below the crucial support of 1.2600 as the market sentiment is bearish. The short-term outlook of the GBP/USD is to the downside as the pair has dropped below the 20-day and 50-day Exponential Moving Averages (EMAs), which are around 1.2687 and 1.2642, respectively.
The Cable hovers near the horizontal support of the Descending Triangle chart pattern, which is plotted from December 21’s low point at 1.2612, while the downward-sloping trendline is placed from December 28’s high point at 1.2827.
The 14-period Relative Strength Index (RSI) declines towards 40.00, which could support the current downside momentum.
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.
