Pound Sterling slides as Fed Powell pushes back large rate cut bets
|- The Pound Sterling drops sharply from 1.3400 against the US Dollar ahead of key US economic data.
- Economists expect US Manufacturing activity to have contracted again in September.
- BoE MPC member Megan Greene said inflation could rise again due to a sharp recovery in consumption.
The Pound Sterling (GBP) drops to near 1.3300 after facing selling pressure near the crucial resistance of 1.3400 against the US Dollar (USD) in Tuesday’s North American session. The GBP/USD pair slumps as investors turn cautious ahead of the United States (US) labor market data, which will provide fresh cues about how much the Federal Reserve (Fed) will reduce interest rates further this year.
The Fed started the policy-easing cycle with an interest rate cut of 50 basis points (bps) to 4.75%-5.00% on September 18. Policymakers decided to opt for a larger-than-usual cut amid growing concerns over slowing job growth and as confidence increases about inflation returning to the bank’s target of 2%.
To get cues about current labor market health, investors will pay close attention to the US ADP Employment Change and Nonfarm Payrolls (NFP) data for September, which will be published on Wednesday and Friday, respectively.
On Monday, Fed Chair Jerome Powell pushed back market expectations of an aggressive rate-cut cycle. "This is not a committee that feels like it is in a hurry to cut rates quickly,” Powell said at the National Association for Business Economics conference. "If the economy evolves as expected, that would be two more cuts by year's end, for a total reduction of half a percentage point more,” he added.
In today’s session, investors will focus on the US JOLTS Job Openings data for August and the ISM Manufacturing PMI data for September, which will be published at 14:00 GMT. Economists expect the job openings to have remained broadly steady in August compared to July at around 7.67 million.
Meanwhile, the ISM Manufacturing PMI is expected to improve slightly to 47.5 from 47.2. Still, the measure would suggest that activity in the factory sector continued to sink.
Daily digest market movers: Pound Sterling weakens against its major peers
- The Pound Sterling underperforms its major peers on Tuesday. The British currency weakens even though market expectations for the Bank of England (BoE) to reduce interest rates in November have eased further after the speech from BoE external policy member Megan Greene at the National Association for Business Economics conference.
- Megan Greene, who voted for leaving interest rates unchanged in the last two policy meetings, indicated that the United Kingdom’s (UK) consumption-driven recovery could spurt price pressures again. Greene warned that the return of the headline inflation to the bank’s target of 2% was due to a temporary decline in Oil prices. Also, inflation in the service sector – which is closely tracked by BoE policymakers – at 5.6% is “worrisome,” she said. However, she remained confident that prices are “moving in the right direction,” Bloomberg reported.
- Financial market participants expect the BoE to cut interest rates one more time in the last quarter of the year, most probably in the December meeting. The BoE pivoted to policy normalization with a 25 bps interest rate cut on August 1 but left borrowing rates unchanged on September 19.
- Going forward, the next major trigger for the Pound Sterling will be the BoE Chief Economist Huw Pill’s speech, which is scheduled at 14:00 GMT. Pill’s speech could provide more guidance on the interest rate outlook for the remainder of the year.
- On the economic data front, the revised estimate of S&P Global/CIPS Manufacturing PMI data for September, came in at 51.5, unchanged from the flash estimate.
Technical Analysis: Pound Sterling falls sharply to near 1.3300
The Pound Sterling falls after facing offers near the key resistance of 1.3400 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as the 20-day Exponential Moving Average (EMA) near 1.3250 is sloping higher.
The Cable is expected to remain firm as it holds the breakout of the trendline plotted from the December 28, 2023, high of 1.2828, delivered on August 21.
The 14-day Relative Strength Index (RSI) tilts down but remains above 60.00, suggesting an active bullish momentum.
Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the 20-day EMA near 1.3235 will be the key support for Pound Sterling bulls.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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