Pound Sterling climbs higher as economists remain gung-ho over UK's economic outlook
|- Pound Sterling trades in a narrow range as investors await fresh guidance on BoE interest-rate outlook.
- The UK business optimism improves amid imminent hopes for BoE pivoting to rate cuts.
- The US Dollar clings to gains amid Middle East tensions.
The Pound Sterling (GBP) jumps higher in Friday's early American session as the United Kingdom's economic outlook strengthens. The GBP/USD pair advances toward Thursday's high as market sentiment improves.
Meanwhile, investors await fresh guidance on Bank of England (BoE) interest rates. While uncertainty over the timing of BoE rate cuts continues to persist, investors hope that the central bank could reduce interest rates in the early part of the second half of this year. The chances for a rate cut in the June policy meeting are under 50%, while a dovish decision for August seems inevitable.
BoE Governor Andrew Bailey said price pressures are expected to come down to the 2% target in spring before picking up again. This may allow the BoE to consider heavily unwinding its historically restrictive monetary policy stance.
Meanwhile, the US Dollar turns sideways after a v-shape recovery amid tightening labor market conditions. For the week ending February 16, individuals claiming jobless benefits for the first time were lower at 201K, against expectations of 218K and the prior reading of 213K. Also, Federal Reserve (Fed) policymakers reiterate the need for more evidence to confirm that inflation will decline to the 2% target.
Daily Digest Market Movers: Pound Sterling advances while US Dollar corrects
- Pound Sterling advances towards 1.2700 while investors look for fresh triggers to get more insights into the interest-rate outlook.
- Bank of England policymakers have turned slightly dovish on interest-rate prospects due to the deepening cost of living crisis.
- BoE members have shifted their focus on how long interest rates will stay at their current levels, which indicates that the current monetary policy is sufficiently restrictive.
- In his testimony before the UK Parliament’s Treasury Select Committee, BoE Governor Andrew Bailey said the central bank doesn’t need inflation at the 2% target to reduce interest rates.
- Andrew Bailey also mentioned that market expectations of rate cuts are not “unreasonable.”
- This week, BoE policymaker Swati Dhingra warned that a delayed rate-cut decision could lead to a hard landing.
- The hard landing indicates a sharp contraction in economic activities if rates remain too high amid easing price pressures.
- On Thursday, the S&P Global/CIPS reported mixed preliminary data for February. The Manufacturing PMI came in at 47.1, lower than expectations of 47.5. While the Services PMI, at 54.3 outperformed expectations of 54.1.
- The S&P Global/CIPS witnessed an upturn in order book and improvement in business optimism as rate cuts from the BoE are imminent this year.
- The agency commented that the technical recession observed in the second half of 2023 in the United Kingdom economy is over. Still, it warned that the Red Sea crisis is disrupting supply chains, leading to increased shipping costs.
- Meanwhile, the market sentiment is broadly quiet amid the absence of potential indicators.
- The US Dollar Index, which measures the Greenback’s value against six competitive currencies, corrects below 104.00.
- The US Dollar struggles to advance despite hawkish remarks in the Federal Open Market Committee (FOMC) minutes of the January policy meeting.
Technical Analysis: Pound Sterling aims to recapture to 1.2700
Pound Sterling approaches the upper range of Thursday’s trading session. The near-term trend is sideways as the pair oscillates in the Descending Triangle pattern formed on a daily timeframe. The aforementioned chart pattern indicates indecisiveness among market participants, carrying a slightly negative bias due to its formation of lower highs.
The downward-sloping border of the Descending Triangle pattern is plotted from December 28 high at 1.2827, while the horizontal support is placed from December 13 low near 1.2500. The pair holds above the 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.2630. Meanwhile, the 14-period Relative Strength Index (RSI) trades in the 40.00-60.00 region, indicating a sharp contraction in volatility.
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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