Pound Sterling falls sharply as geopolitical tensions deepen
- Pound Sterling comes under pressure as Middle East tensions escalate
- Persistent UK inflation would allow the BoE to deliver rate cuts later than other G-7 economies.
- The USD index turns lackluster after a corrective move as investors digest hawkish rhetoric from Fed policymakers.
The Pound Sterling (GBP) faces sharp selling pressure in Thursday’s early New York session. Investors rush for safe-haven assets as Israel’s Prime Minister Benjamin Netanyahu has rejected the proposal of a ceasefire with Hamas. The Israeli leader said the complete destruction of Hamas is a few months away.
Meanwhile, lack of fresh economic triggers has also increased anxiety among investors. The GBP/USD pair broadly consolidates as traders await commentary from Bank of England (BoE) policymaker Catherine Mann for more guidance on future interest rates. If interest rates remain high in the UK compared to counterparts, GBP will likely be bullish as higher interest rates tend to attract more significant foreign capital inflows.
On Wednesday, BoE Deputy Governor Sarah Breeden joined Chief Economist Huw Pill and said that the central bank is now focusing on the length of time that interest rates are required to remain at current levels.
In the last monetary policy statement, BoE Governor Andrew Bailey also said the longevity of higher interest rates depends upon upcoming data.
Apparently, BoE policymakers are gradually considering exiting from ultra-hawkish interest rates. However, the time period required for shifting to an easy monetary policy by the BoE is likely to be much longer than the Federal Reserve (Fed) and the European Central Bank (ECB) due to significant differences in wage growth momentum.
The Pound Sterling is expected to face volatility as BoE policymaker Catherine Mann is scheduled to speak at 15:00 GMT on Thursday. Mann is expected to maintain the hawkish rhetoric as she was one of the two of nine policymakers who voted for an interest rate hike by 25 basis points (bps) in the monetary policy meeting held on February 1.
Daily Digest Market Movers: Pound Sterling comes under pressure on dismal market mood
- Pound Sterling falls below 1.2600 as investors lean towards safe-haven assets amid a cautious market mood.
- Investors seek meaningful guidance over when and how much the Bank of England (BoE) will reduce interest rates this year.
- After a series of declines in price pressures, BoE policymakers are gradually leaning towards an expansionary policy stance.
- On Wednesday, BoE Deputy Governor Sarah Breeden highlighted strong wage growth momentum as a factor feeding price pressures.
- Sarah Breeden said inflationary pressures in the United Kingdom economy are still persistent but are well contained within the BoE’s forecast, making her less concerned about further policy tightening.
- Breeden added the focus of Monetary Policy Committee (MPC) members has now shifted to how long interest rates are needed to remain at restricted levels.
- Breeden added that the central bank will focus on how pay growth and aggregate demand evolve ahead, allowing them more time to gain confidence about when inflation will return to the 2% target.
- Meanwhile, the US Dollar Index (DXY) is stuck in a tight range around 104.00.
- Federal Reserve policymakers are avoiding speculation over the timing of interest rate cuts, emphasizing keeping restrictive interest rates for longer until they get greater confidence that inflation will return to the 2% target.
- Investors see no offering of timing over Fed-rate cuts, forcing them to shift to the sidelines.
- Next week, the release of the US inflation data for January is expected to provide a meaningful outlook on the future course of interest rates.
Technical Analysis: Pound Sterling slumps below 1.2600
Pound Sterling faces pressure above 1.2600 in Thursday’s European session. The Cable fails to continue its two-day winning spell. On a daily time frame, the GBP/USD pair has rebounded to near the 50-period Exponential Moving Average (EMA), which trades around 1.2640. The 20-period EMA has turned down, indicating a weak outlook in the very short-term. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a lackluster performance ahead.
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.
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.
