- The Pound Sterling's recovery against the US Dollar stalls after refreshing a two-week high near 1.2750.
- The US Dollar is preset to end the week on a negative note.
- Investors expect the BoE policy-easing cycle will be slower than in the US.
The Pound Sterling (GBP) surrenders its intraday gains after refreshing a two-week high near 1.2750 against the US Dollar (USD) in Friday’s North American session. The GBP/USD pair falls back as the US Dollar rebounds in a thin volume trading day due to the Thanksgiving holidays. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back after posting a fresh two-week low near 105.60.
However, the US Dollar is on course to end the week with a near 1.5% decline. The correction in the US Dollar started on Monday after United States (US) President-elect Donald Trump nominated seasoned hedge fund manager Scott Bessent to fill the position of Treasury Secretary.
Investors watered down the so-called ‘Trump trades’ after financial market participants regarded Bessent as a “safe pair of hands”. In an interview with the Financial Times (FT) last weekend, Bessent said he will focus on enacting Trump’s tariffs but will be “layered in” gradually, a scenario that would maintain geopolitical steadiness. Also, Bessent preferred to reduce the budget deficit to 3% of Gross Domestic Product (GDP), a move that will maintain fiscal discipline.
Going forward, the US Dollar will be guided by market expectations for the Federal Reserve (Fed) interest rate action in the December meeting and next year. According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 25 bps to the 4.25%-4.50% range in the December meeting is 66%, while the rest supports leaving them unchanged. For 2025, traders price in a 75-bps interest rate reduction by the year-end, Reuters reported.
Daily digest market movers: Pound Sterling trades with caution despite firm BoE gradual rate cut prospects
- The Pound Sterling trades cautiously against its major peers on Friday even though investors expect the Bank of England (BoE) to cut interest rates more gradually, given the higher inflation in the United Kingdom (UK) economy, especially in the services sector. UK’s inflation report for October showed that the annual core Consumer Price Index (CPI) – which excludes volatile items – accelerated to 3.3%, and the service inflation rose by 5%. Inflation in the services sector is closely tracked by BoE officials for decision-making on the interest rate policy.
- This week, BoE Deputy Governor Clare Lombardelli warned about risks of inflation remaining higher than the bank’s forecast, where wage growth normalizes at 3.5%-4% and the Consumer Price Index (CPI) around 3% rather than 2%, in her speech at King's Business School on Monday.
- The British currency is weakest against the Japanese Yen (JPY), which is outperforming across the board as market expectations for the Bank of Japan (BoJ) to raise interest rates in December have escalated.
Technical Analysis: Pound Sterling falls after facing selling pressure near 20-day EMA
The Pound Sterling drops after posting a fresh two-week high near 1.2750 against the US Dollar on Friday. The GBP/USD pair faces selling pressure after accelerating its recovery near the 20-day Exponential Moving Average (EMA), which trades around 1.2725. The recovery move in the Cable was initiated after finding buying interest near the upward-sloping trendline around 1.2550 earlier this week, which is plotted from the October 2023 low around 1.2040. Before that, the pair had a one-sided fall from more than a two-year high above 1.3400.
The 14-day Relative Strength Index (RSI) rebounds after turning oversold. However, the downside bias is still intact.
Looking down, the pair is expected to find a cushion near the upward-sloping trend line around 1.2600, followed by the psychological support of 1.2500. On the upside, the 200-day EMA around 1.2830 will act as key resistance.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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