Pound Sterling declines against US Dollar despite firm Fed dovish bets
- The Pound Sterling falls sharply to near 1.3430 against the US Dollar as the Greenback’s safe-haven demand has increased.
- All eyes are on the speeches of several Fed officials as the bank is expected to cut interest rates two more times this year.
- Investors await BoE Pill’s speech due Wednesday for fresh cues on the monetary policy outlook.
The Pound Sterling (GBP) declines 0.3% to near 1.3440 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD pair slumps as the safe-haven demand of the US Dollar increases due to political jolts in Japan and France.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gains 0.25% to near 98.35.
Broadly, firm Federal Reserve (Fed) dovish bets and ongoing US government shutdown are expected to keep a lid on the US Dollar’s upside. Fed dovish bets have increased amid weakening labor market conditions, with consumer inflation expectations remaining anchored.
According to the CME FedWatch tool, traders see an 81.5% chance that the Fed will reduce borrowing rates in each of its two remaining monetary policy meetings this year.
For fresh cues on the central bank's outlook, investors await speeches from a slew of Fed officials: Atlanta Fed President Raphael Bostic, Fed Governors Michelle Bowman and Stephen Miran, and Minneapolis Fed President Neel Kashkari, all scheduled for this Tuesday during the North American session. Investors would like to know the current status of the US labour market due to the absence of key economic data releases amid the government shutdown.
Daily digest market movers: Pound Sterling underperforms ahead of BoE Pill's speech
- The Pound Sterling underperforms its peers on Tuesday amid rising expectations that the Bank of England (BoE) could cut interest rates one more time in the remainder of the year.
- BoE dovish expectations have slightly increased amid growing United Kingdom (UK) labour market concerns. The latest BoE survey showed that businesses in the three months to September expected to keep employment steady over the next 12 months, the first time since January when they have been observed reluctant to increase staffing, Reuters reported.
- Slowing UK job demand is expected to allow BoE officials to turn dovish on interest rates in November’s monetary policy meeting. Until now, the central bank has retained a “gradual and careful” monetary easing approach.
- The BoE has refrained from reducing interest rates aggressively as price pressures have remained well above the 2% target for a long period. However, the BoE stated in September’s meeting that inflation would peak around 4% in the same month.
- For more cues on the UK’s interest rate outlook, investors will focus on the speech from BoE Chief Economist Huw Pill, which is scheduled on Wednesday. Pill was one of seven Monetary Policy Committee (MPC) members who voted to keep interest rates on hold at 4% in September.
Technical Analysis: Pound Sterling continues to face pressure near 20-day EMA
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The Pound Sterling slides to near 1.3440 against the US Dollar on Tuesday. The GBP/USD pair struggles to return above the 20-day Exponential Moving Average (EMA), which trades around 1.3475.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a sideways trend.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the September 17 high of 1.3726 will act as a key barrier.
BoE FAQs
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).
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.
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.
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.
