Pound Sterling slumps against US Dollar with eyes on Fed's policy

The Pound Sterling falls to 1.2530 as investors turn cautious ahead of the Fed’s policy announcement.
Investors will also focus on US Manufacturing PMI and labor market data in addition to the Fed's policy.
Market expectations for UK interest rates will guide the Pound Sterling.

The Pound Sterling (GBP) edges down from a two-week high of 1.2570 but holds above the psychological support of 1.2500 against the US Dollar (USD) in Tuesday’s early American session. The GBP/USD pair comes under pressure as investors await the US Federal Reserve’s (Fed) monetary policy announcement on Wednesday for fresh guidance.

A data-packed week in the United States will keep the US Dollar on tenterhooks. On the other side of the Atlantic, the United Kingdom's economic calendar is light. Therefore, market speculation for the Bank of England’s (BoE) interest rate policy on May 9 will guide the Pound Sterling. The BoE is expected to maintain the status quo, but guidance on interest rates is expected to be slightly on the dovish side.

BoE Governor Andrew Bailey is confident about a sharp decline in the headline inflation of April and sees market expectations for two or three rate cuts this year as reasonable. Also, BoE Deputy Governor Dave Ramsden has predicted that risks of inflation remaining persistent have receded. The BoE could shed more light on the time frame from when it could start reducing interest rates. Market participants remain divided between June or August meetings from when the BoE could pivot to interest rate cuts.

Daily digest market movers: Pound Sterling falls as US Dollar rebounds on higher Q1 Employment Cost data

The Pound Sterling struggles to extend upside above the immediate resistance of 1.2560 against the US Dollar. The US Dollar rebounds sharply as the Q1 Employment Cost index grew at a stronger pace of 1.2% from the consensus of 1.0% and the prior reading of 0.9%. The higher Employment Cost Index suggests rising wage growth, which feeds consumer price inflation.
Going forward, the major event for investors will be the Federal Reserve’s interest rate decision, which will be announced on Wednesday. Investors will keenly focus on the interest rate guidance as policymakers are expected to vote for holding interest rates steady in the range of 5.25%-5.50%.
Inflation measures for March have indicated that price pressures remain persistently higher due to robust consumer spending and tight labor market conditions. This would force the Fed to support the argument of keeping interest rates higher for a longer period. Fed policymakers are expected to continue with their current monetary policy framework until they get sufficient evidence that inflation will sustainably return to the desired rate of 2% target.
The US Dollar Index (DXY) rebounds to near 106.00 on expectations that the Fed will maintain a hawkish guidance. Before the Fed policy, investors will watch the ADP Employment Change and the ISM Manufacturing Purchasing Managers Index (PMI) data for April. US private employers are forecasted to have hired 179K job-seekers, slightly lower from the prior reading of 184K.
The US ISM PMI is expected to remain above the 50.0 threshold that separates expansion from contraction but will drop slightly to 50.1 from 50.3. On the same, the survey by S&P Global for April showed that the factory data fell below the 50.0 threshold. The agency reported a sharp decline in the scale of production and new orders due to inflationary pressures, weak demand and sufficient stock holdings at customers.
Later this week, the US Dollar will be guided by the Nonfarm Payrolls (NFP) report for April, which will be published on Friday.

Technical Analysis: Pound Sterling trades above the 1.2500 support

The Pound Sterling falls from a two-week high of 1.2570 against the Greenback. The GBP/USD pair struggled to extend its upside reaching the breakdown region of the Head and Shoulder chart pattern formed on a daily timeframe. The Cable witnessed a sharp fall after breaking below the crucial support of 1.2535 on April 12, but it has recovered recent losses since then.

Cable's near-term outlook has improved as it trades comfortably above the 20-day Exponential Moving Average (EMA), which is around 1.2516.

The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting a consolidation ahead.

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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