Pound Sterling remains on edge as hopes of rate cuts from BoE escalate
|- Pound Sterling fails to hold gains inspired by upbeat S&P Global Services PMI data.
- The UK economy is on the brink of a technical recession.
- BoE’s Pill signals that policymakers are discussing when the central bank could start reducing interest rates.
The Pound Sterling (GBP) struggles to hold the recovery move in the European session on Tuesday as the near-term outlook for risk-sensitive assets is bearish. The appeal of safe-haven assets is broadly upbeat as investors see the Federal Reserve (Fed) not rushing to cut interest rates. Receding risks of a recession in the United States due to strong labor and retail demand are allowing plenty of time for Fed policymakers to decide on rate cuts.
The GBP/USD fails to accelerate gains even though the UK’s S&P Global/CIPS Services PMI has improved in January. The economic data rose to 54.3, better than expectations of 53.8 and the former reading of 53.4. The agency reported that a robust inflow of fresh orders, strong hiring in the last six months, and deepening prospects of rate cuts by the Bank of England (BoE) led to a strong uptick in the Services PMI.
Daily Digest Market Movers: Pound Sterling consolidates while US Dollar struggles to extend rally
- Pound Sterling struggles to grip the 1.2500 tentative support discovered in the late Asian session on Tuesday as the broader appeal is still downbeat amid a cautious market mood.
- The outlook for risk-perceived assets is bearish as hopes of aggressive rate cuts by the Federal Reserve have waned due to resilient United States economic growth.
- As per the CME Fedwatch tool, investors see a rate cut of 25 basis points (bps) in May from earlier expectations of March.
- The US economy is performing well amid improving order books for the factory and IT sector, upbeat labor market conditions, and robust consumer spending.
- Minneapolis Federal Reserve Bank President Neel Kashkari said on Monday that lower risks to economic growth are allowing more time for the central bank to decide on rate cuts.
- The Pound Sterling is also facing risks of a technical recession that could force Bank of England policymakers to lean towards a dovish interest rate stance.
- It is worth mentioning that an economy is considered to be in a technical recession if it contracts for two straight quarters.
- The United Kingdom's economy contracted by 0.1% in the third quarter of 2023, and the likelihood of a technical recession is high as it is expected to underperform again.
- A slight dovish guidance on interest rates from BoE Chief Economist Huw Pill has also dampened the appeal for the Pound Sterling.
- BoE Pill said on Monday that the stance of “if” it is appropriate to cut interest rates has changed to “when.”
- In the latest monetary policy statement, BoE Governor Andrew Bailey said inflation is moving in the right direction and kept borrowing costs “under review”.
- Due to a light economic calendar, market participants will focus on the speech from BoE Catherine Mann, which is scheduled for Thursday. Mann was one of two of nine Monetary Policy Committee (MPC) members who voted for a rate hike of 25 bps.
Technical Analysis: Pound Sterling holds above 1.2500
Pound Sterling falls back to near seven-week low of 1.2520. Earlier, the GBP/USD pair advanced to test the breakdown of the Descending Triangle chart pattern formed on the daily time frame. The Cable is expected to face an intense sell-off after a soft test of the breakdown region near 1.2600.
The 14-period Relative Strength Index (RSI) has slipped below 40.00 for the first time in three months. More downside is possible amid an absence of divergence and oversold signals.
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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