- The Pound Sterling extended its pullback from yearly highs against the US Dollar.
- GBP/USD still seems like a ‘buy-the-dips’ trade heading into the Fed and BoE policy meetings.
- Pound Sterling buyers stay hopeful, as technicals remain favorable.
The Pound Sterling (GBP) stretched its corrective downside from yearly highs against the US Dollar (USD), sending GBP/USD back under 1.2900 – the lowest level in over a week.
Pound Sterling succumbed amid heightened risk aversion
GBP/USD maintained its corrective downside mode during the past week, despite a broadly rangebound US Dollar. Divergent monetary policy outlooks between the US Federal Reserve (Fed) and the Bank of England (BoE) also failed to offer the much-needed lift to the Pound Sterling, as the sentiment around the higher-yielding currency was dented by resurfacing concerns over China’s economic slowdown.
Markets turned risk averse after policymakers at China’s Third Plenum failed to roll out any strong policy measures to stimulate the post-pandemic economic recovery. Additionally, surprise interest rate cuts by the People’s Bank of China (PBOC) and several Chinese state-owned banks accentuated mounting worries over China’s economic prospects.
China's central bank, cut the one-year Medium-term Lending Facility (MLF) rate from 2.50% to 2.30% on Thursday. Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (AgBank), China Construction Bank, Bank of China and Bank of Communications cut deposit rates by 5 to 20 basis points (bps), according to statements on their websites.
This combined with an unimpressive start to the earnings reports from the “Magnificent Seven” megacap technology companies kept the market environment dour. Although Google parent Alphabet delivered a beat on both the top and bottom lines, the company’s chief signaled patience will be needed to see concrete results from artificial intelligence investments. Meanwhile, Tesla fell as much as 7% after profit fell short of estimates and the electric-vehicle giant delayed its Robotaxi event to October.
The USD, however, was unable to take advantage of the risk-off sentiment, as it bore the brunt of the relentless USD/JPY sell-off. The Japanese Yen rebounded firmly to three-month highs against the Greenback on carry trades unwinding, courtesy of heightening expectations that the Bank of Japan (BoJ) will hike rates by 10 basis points (bps) next Wednesday. Additionally, markets fully priced in a September Fed rate cut, weighing negatively on the buck.
Nonetheless, the upbeat US Gross Domestic Product (GDP) for the second quarter of 2024, alongside a sharp USD/JPY upswing, did offer some saving grace to USD buyers toward the end of the week. But expectations of a softer US core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, curbed the US Dollar’s enthusiasm, lifting the GBP/USD pair from near 1.2850 key demand area.
On Thursday, the core PCE deflator rose 2.9% at an annualized rate in Q2, down from 3.7% in the previous quarter, indicating a moderation in inflationary pressure,” analysts at RBC Economics noted. Meanwhile, the US economy expanded at an annualized rate of 2.8% in Q2 2024, doubling from the 1.4% growth reported in the previous quarter.
The US Bureau of Economic Analysis reported on Friday that inflation in the US, as measured by the change in the PCE Price Index, edged lower to 2.5% on a yearly basis in June from 2.6% in May. The core PCE Price Index, which excludes volatile food and energy prices, rose 2.6% in the same period, matching May's increase. GBP/USD showed little to no reaction to these data ahead of the weekend.
All eyes on Fed, BoE policy decisions and Nonfarm Payrolls
Another action-packed week unfolds for the Pound Sterling, as all the attention remains centered on the policy announcements by the Fed and the BoE on Wednesday and Thursday respectively.
Monday is quiet, in terms of any macro releases from both sides of the Atlantic while Tuesday will feature the BoE Quarterly Bulletin, US CB Consumer Confidence and JOLTS Job Openings survey.
The Fed and BoE interest rate decision and banks’ outlook on rates will set the tone for the Pound Sterling markets in the coming weeks. Markets have fully priced in a September Fed rate cut. On the other hand, interest rate futures are pricing a 51% chance that the BoE will reduce rates by 25 bps next week while projecting 54 bps of cuts for 2024, up from 49 bps of cuts on Wednesday.
The weekly US Jobless Claims and the ISM Manufacturing PMI will be published on Thursday, following the BoE events.
The all-important US Nonfarm Payrolls will hog the limelight on Friday, as Fed policymakers return after a two-week ‘blackout period’. BoE Chief Economist Huw Pill is also due to speak on Friday.
GBP/USD: Technical Outlook
The Pound Sterling correction is seen paving the way for a fresh uptrend, as portrayed by the GBP/USD daily chart.
The 14-day Relative Strength Index (RSI) has stalled its descent and holds above the 50 level, currently near 52.50, suggesting that buyers still remain in the game.
However, a daily candlestick close below the key 21-day Simple Moving Average (SMA) support at 1.2851 will shake off any odds for a recovery.
On a renewed downside, the immediate cushion will be seen at the previous key resistance near 1.2800.
Further south, the 50-day SMA at 1.2777 will be tested, exposing sellers to the 100-day SMA at 1.2682.
Alternatively, recapturing the weekly high of 1.2942 is critical to initiate a fresh uptrend toward the yearly high of 1.3045.
Ahead of that level, the 1.3000 round figure will challenge the bearish commitments.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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