Pound Sterling rebounds ahead of FOMC minutes, preliminary PMIs

Pound Sterling finds support ahead of FOMC minutes
BoE Bailey supports market expectations for rate cuts.
This week, investors will focus on S&P Global/CIPS preliminary PMI for February.

The Pound Sterling (GBP) eyes recovery in Wednesday’s early New York session ahead of the Federal Open Market Committee (FOMC) minutes. The GBP/USD pair rebounds, even though Bank of England (BoE) policymaker Swati Dhingra warns about the downside risks of restrictive interest rates to the United Kingdom's living standard. When asked about the inflation outlook, Dhingra said the headline inflation appears bumpy but moves downward.

On Tuesday, BoE Governor Andrew Bailey and other policymakers were slightly dovish while speaking before UK lawmakers at the UK Parliamentary Treasury Select Committee.

Andrew Bailey said market expectations for rate cuts are not “unreasonable” and there are “encouraging signs” that price pressures are easing but refused to comment on the timing and degree of restrictive policy unwinding.

BoE Deputy Governor Ben Broadbent said the central bank's focus has shifted from the degree of restrictive monetary policy to its duration. Meanwhile, BoE policymaker Swati Dhingra

Daily Digest Market Movers: Pound Sterling bounces back while US Dollar turns subdued

Pound Sterling rebounds to 1.2625 as the US Dollar edges down ahead of the Federal Reserve (Fed) minutes for the January policy meeting.
The FOMC minutes will provide in-depth reasoning behind maintaining interest rates steady in the range of 5.25%-5.50%.
The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, broadly remains on the backfoot as Fed policymakers are confident that inflation is moving in the right direction.
The Pound Sterling fails to hold gains as Bank of England Governor Andrew Bailey and his teammates said rate cuts can be announced before inflation declines to their 2% target whilst speaking before the United Kingdom parliament’s Treasury Select Committee on Tuesday.
Andrew Bailey denied to comment on the timing of rate cuts, however, he supported market expectations for the unwinding of historically restrictive interest rate stance.
Bailey warned about inflation picking up again after returning temporarily to the desired target in spring. He said the BoE wants to achieve price stability sustainably.
When asked about the economic outlook, Andrew Bailey said the technical recession in the second half of 2023 was historically modest, and an upturn is probably underway.
Meanwhile, BoE Deputy Governor Ben Broadbent said the labor market is releasing some heat, which indicates that current monetary policy is sufficiently restrictive.
Ben Broadbent added that the central bank has shifted its focus to the duration of holding interest rates at 5.25%, but rate cuts are not desirable at the current stage due to insufficient evidence.
Broadbent’s view is based on data that indicates wage growth and service inflation are double the pace consistent with sustainable consumer price inflation.
Going forward, the preliminary S&P Global/CIPS PMI data for February will guide further action in the Pound Sterling, which will be published on Thursday.
The Manufacturing PMI is expected to come out below the 50.0 threshold at 47.5, higher than the former reading of 47.0.

Technical Analysis: Pound Sterling remains comfortable above 1.2600

Pound Sterling bounces back, aiming to recapture a two-week high of 1.2684. The GBP/USD pair is broadly sideways amid a Descending Triangle formation on a daily timeframe. The aforementioned chart pattern indicates a sharp contraction of volatility but with a slightly negative bias due to the formation of lower highs.

The downward-sloping border of the Descending Triangle pattern is plotted from December 28 high at 1.2827, while the horizontal support is placed from December 13 low near 1.2500.

The 20 and 50-day Exponential Moving Averages (EMAs) near 1.2630 continue to act as a barricade for the Pound Sterling bulls.

Meanwhile, 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating an indecisiveness among market participants.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

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).

How does the Bank of England’s monetary policy influence Sterling?

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.

What is Quantitative Easing (QE) and how does it affect the Pound?

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.

What is Quantitative tightening (QT) and how does it affect the 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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