Pound Sterling faces sell-off amid cautious market mood, Fed-BoE policy in focus


  • Pound Sterling slips ahead of US, UK central banks’ policy decisions.
  • The BoE and the Fed are expected to keep interest rates steady.
  • BoE policymakers are expected to offer hawkish guidance amid higher inflation.

The Pound Sterling (GBP) faces pressure amid volatility ahead of the interest rate announcements by the Bank of England (BoE) and the Federal Reserve (Fed) and deepening Middle East crisis. The GBP/USD pair below1.2700 as investors are anticipated to make their bets after this week’s policy announcements. 

Trades see the BoE maintaining interest rates unchanged at 5.25% for the fourth time in a row as core inflation in the United Kingdom more than doubles the desired rate of 2%. Market participants will keenly focus on the interest rate outlook provided by the central bank. 

The first interest rate decision of 2024 is expected to be challenging for BoE policymakers as inflation has proven to be more stubborn than expected and a technical recession is increasingly likely. Consumer spending has been hit hard due to the deepening cost-of-living crisis. Chances of a recession would escalate if the BoE delivers a hawkish guidance.

Meanwhile, market sentiment remains downbeat as US President Joe Biden pledges to retaliate for aerial drone attacks on US service personnel near northeartern Jordan. Iran denied claims stating their involvement in drone attacks.

Daily digest market movers: Pound Sterling drops while US Dollar strengthens

  • The Pound Sterling struggles to shift above 1.2700 as investors shift their focus towards the monetary policy announcements by the Federal Reserve and the Bank of England, which are due this week.
  • The BoE is widely anticipated to keep interest rates unchanged amid persistent price pressures.
  • Interest rates are expected to remain steady at 5.25% for the fourth time in a row. Investors will keenly focus on the guidance on interest rates.
  • Unlike the Fed and the European Central Bank (ECB), BoE policymakers have not talked about the timing or scope of rate cuts yet.
  • Underlying inflation in the United Kingdom is higher than in the rest of the Group of Seven economies. This will likely allow BoE policymakers to deliver hawkish guidance on the interest rate outlook.
  • Discussions among BoE officials will likely remain supportive of keeping interest rates restrictive until policymakers get confident that inflation will return to the 2% target in a sustainable manner.
  • BoE policymakers have said rate cuts at the current stage would be “premature” as they could lead to a rebound in price pressures.
  • Meanwhile, the US Dollar Index (DXY) strengthens ahead of the Fed’s monetary policy decision and key data such as employment and Manufacturing PMI for January.
  • Investors see the Fed maintaining the status-quo for a fourth straight time. The entire focus will be on the timing of when the Fed will start reducing interest rates.
  • Fed officials projected a reduction in interest rates by 75 basis points (bps) in 2024. Market participants will focus on how the Fed will fit these three expected rate cuts from or after the March monetary policy meeting.
  • Before the Fed’s policy decision, market participants will focus on the JOLTS Job Openings data for December. US employers are expected to have offered 8.75 million jobs in December, slightly lower from the 8.79 million job postings recorded in November.

Technical Analysis: Pound Sterling falls below 1.2700

Pound Sterling fails to susatin above 1.2700 ahead of the key monetary policy announcements on both sides of the Atlantic. The GBP/USD pair oscillates inside Friday’s trading range of 1.2675-1.2758, indicating a sharp contraction in volatility. On a daily timeframe, the Cable demonstrates a long inventory adjustment between retail participants and institutional investors. The 20-day Exponential Moving Average (EMA) near 1.2700 overlaps the Cable’s current trading range, adding to evidence that investors have sidelined ahead of the data-packed week.

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.

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