Pound Sterling declines ahead of Fed, BoE decisions outcome
|- The Pound Sterling declines to near 1.2825 against the US Dollar ahead of the Fed, BoE policy decisions outcome.
- Firm speculation for BoE rate cuts on Wednesday has weighed heavily on the Pound Sterling.
- The US Dollar slumps as the Fed is expected to deliver a dovish guidance on interest rates.
The Pound Sterling (GBP) weakens in Wednesday’s London session amid caution ahead of the Bank of England’s (BoE) interest rate decision, which will be announced on Thursday. The British currency declines against its major peers, except the Australian Dollar (AUD), as investors see the BoE reducing interest rates in the August meeting for the first time since March 2020. The BoE has been maintaining a restrictive monetary policy stance since December 2021 in an attempt to bring inflation down, which was driven by pandemic-led stimulus.
Market experts see the BoE cutting rates by 25 basis points (bps) a tough call as policymakers have hesitated to endorse rate cuts due to high inflation in the service sector. United Kingdom’s (UK) annual service inflation grew steadily by 5.7% in June, higher than the bank’s forecast of 5.1% and roughly double the level needed to boost confidence for rate cuts.
While expectations of BoE rate cuts have risen significantly, the central bank is less likely to commit to a specific policy expansion path amid firm wage growth momentum.
Daily digest market movers: Pound Sterling drops on firm BoE rate-cut bets
- The Pound Sterling edges lower to near 1.2825 against the US Dollar (USD) in Wednesday’s European session. The GBP/USD falls despite weakness in the US Dollar, suggesting the British currency is facing severe selling pressure. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls by 0.2% to 104.20 on the day, with investors focusing on the Federal Reserve’s (Fed) monetary policy, which will be announced on Wednesday at 18:00 GMT.
- The Fed is widely anticipated to leave interest rates unchanged in the range of 5.25%-5.50%. This would be the eighth consecutive decision to keep key borrowing rates steady at their current levels since July 2023. In spite of expectations of a steady interest rate decision, investors will remain on their toes as the Fed is expected to communicate a clear signal that rate cuts are around the corner.
- According to the CME FedWatch Tool, 30-day Federal Fund Futures pricing data shows that the central bank reducing interest rates by 25 basis points (bps) in the September meeting is already priced in.
- Expectations for the Fed to begin reducing interest rates have been prompted by improved confidence that inflation will return to the bank’s target of 2%. The confidence was fueled by lower-than-expected readings in the United States (US) Consumer Price Index (CPI) data for May and June and a sharp deceleration in the Q2 Gross Domestic Product (GDP) Price Index. Also, moderating labor market conditions have strengthened speculation for rate cuts in September.
- In Wednesday’s session, investors will also focus on the ADP Employment Change data for July, which will be published at 12:15 GMT. The report is expected to show that labor demand in the private sector was steady as fresh payrolls were 150K, in line with June’s reading.
Technical Analysis: Pound Sterling falls below 20-day EMA
The Pound Sterling declines gradually toward the lower boundary of a rising channel chart formation on a daily timeframe. The GBP/USD pair accelerated lower after breaking below the crucial support of 1.2900. The Cable dropping below the 20-day Exponential Moving Average (EMA) near 1.2860 suggests uncertainty in the near-term trend.
The 14-day Relative Strength Index (RSI) declines toward 40.00, which would a be cushion for the momentum oscillator.
On the downside, the round-level support of 1.2800 will be a crucial support zone for the Pound Sterling bulls. Meanwhile, the two-year high near 1.3140 will be a key resistance zone for the Cable.
Pound Sterling FAQs
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).
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.
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.
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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