Pound Sterling rallies as BoE is expected to deliver rate cuts after Fed
- The Pound Sterling remains upbeat amid hopes that the Fed will cut interest rates before the Bank of England.
- The UK budget for 2024 was broadly in line with market expectations.
- Easing US labor market conditions have built downward pressure on the US Dollar.
The Pound Sterling (GBP) exhibits strength against the US Dollar in Thursday’s London session as investors hope that the Bank of England (BoE) will start reducing interest rates after the Federal Reserve (Fed). Market expectations for a rate cut by the BoE and the Fed are for June and August policy meetings, respectively.
Apart from expectations that the BoE will choose to cut interest rates later than other central banks of the Group of Seven economies (G-7), the announcement of the scope of fiscal stimulus in the United Kingdom’s budget for 2024 has also strengthened the Pound Sterling.
The Chancellor of the Exchequer, Jeremy Hunt, said on Wednesday that the UK administration intends to reduce public sector net debt and budgetary deficit while supporting economic growth.
Going forward, the UK’s Average Earnings data for the three months ending in January, which will be published early next week, will provide a fresh outlook on inflation. Wage growth has remained at a level that almost doubles what is required to be consistent for the return of inflation to 2%. Strong wage growth momentum would dampen market expectations for rate cuts, which could benefit the Pound Sterling.
Daily digest market movers: Pound Sterling extends its upside, US Dollar weakens ahead of Powell's testimony
- The Pound Sterling edges higher above 1.2700 as investors seek fresh insights on the interest rate outlook.
- The measures outlined in the United Kingdom budget 2024, announced by the Chancellor of the Exchequer Jeremy Hunt, were majorly aligned with expectations. Hunt announced a two-percentage cut to National Insurance Contributions (NICs), saving the average earner around 450 pounds this year. Combined with last year’s cut, total savings for workers would be 900 pounds.
- Jeremy Hunt announced that the OBR had raised growth forecasts for 2024 and 2025 to 0.9% and 1.9%, respectively. The administration intends to increase defense spending to 2.5% of the Gross Domestic Product (GDP). Capital gains tax on property sales will be lowered to 24% from 28%. The government has extended the freeze on fuel and alcohol duty.
- Going forward, market expectations for rate cuts by the Bank of England will guide the Pound Sterling. Investors expect the BoE to start reducing interest rates in August. However, BoE policymakers have said that they want evidence of inflation returning sustainably to 2% before taking such a decision.
- On the other side of the Atlantic, the United States ADP Employment Change for February and JOLTS Job Openings data for January pointed to slowing labor demand. This has built downside pressure on the US Dollar. The US Dollar Index (DXY), which measures the Greenback’s value against six major currencies, has revisited a monthly low near 103.20.
- The uncertainty over the timing of the Federal Reserve rate cut continues, as Chair Jerome Powell said, "We do not expect it will be appropriate to reduce policy rates until we have greater confidence in inflation moving sustainably toward 2%," in his prepared statement in the semi-annual monetary policy report delivered to Congress.
Technical Analysis: Pound Sterling rises to 1.2760
Pound Sterling continues its winning spell for the fifth trading session on Thursday. The GBP/USD pair strengthens after an upside break of the Descending Triangle pattern formed on a daily time frame. The pair has printed a fresh monthly high near 1.2760. An upside break of the aforementioned chart pattern indicates that ticks forming on the upside will be wider than average. The 20-day Exponential Moving Average (EMA) near 1.2670 has tilted towards the north, indicating that the near-term appeal is strong.
The 14-period Relative Strength Index (RSI) climbs above 60.00 for the first time in over two months. This indicates a strong upside momentum ahead as overbought, and divergence signals are absent.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
