Pound Sterling Slides as Fed Rate Cut Expectations Diminish
The Pound Sterling has edged lower to near 1.3400 against the US Dollar as the latter strengthens. Investors are closely watching Fed Chair Powell's upcoming speech for further clues about the monetary policy outlook. Earlier, flash UK S&P Global Composite PMI for August surpassed market forecasts.
The GBP/USD pair is extending its losing streak for the fifth consecutive day as the US Dollar continues to gain ground amid reduced expectations of aggressive interest rate cuts by the Federal Reserve (Fed) at its September monetary policy meeting. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, reached a 10-day high near 98.80 during European trading hours.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) in September has decreased to 73.3% from 85.4% a week earlier. These dovish expectations have softened ahead of Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium, scheduled for 14:00 GMT. Powell is expected to reiterate his stance that monetary policy adjustments are premature until the central bank gains more clarity on the impact of tariffs on inflation and economic growth.
"With another inflation and payrolls print still due before the September meeting, Powell has every reason to stay patient and keep optionality open," analysts at Saxo noted. Adding to the sentiment, comments from Kansas City Fed Bank President Jeffrey Schmid on Thursday suggested that there is no immediate urgency to cut interest rates, as inflation remains above the central bank’s 2% target. Schmid stated, "Not in a hurry to cut interest rates as inflation number likely closer to 3 than 2, and there is work to do," Reuters reported. It's important to note that Schmid is a voting member of the Federal Open Market Committee (FOMC).
Daily Market Movers: Pound Sterling's Performance
The Pound Sterling is trading relatively stable against its major counterparts on Friday following the release of stronger-than-expected preliminary S&P Global Purchasing Managers’ Index (PMI) data for August on Thursday. The report indicated that the Composite PMI expanded at a faster-than-anticipated pace to 53.0, driven by robust growth in the services sector. New business also returned to growth in August after a slight decline in July. However, ongoing layoffs and rising prices charged by private companies to offset increased National Insurance (NI) costs remain key concerns for Bank of England (BoE) policymakers.
The BoE faces a delicate balancing act when announcing its interest rate decision at the September monetary policy meeting, considering the combination of weak labor demand and escalating inflationary pressures. During the policy meeting earlier this month, the BoE lowered interest rates by 25 bps to 4% with a narrow majority, reiterating its “gradual and careful” approach to monetary easing.
This week's UK Consumer Price Index (CPI) report for July revealed that both headline and core inflation grew at a faster-than-projected pace of 3.8% year-on-year. On the geopolitical front, uncertainty surrounding a potential truce between Russia and Ukraine has intensified following Moscow's overnight attack on Kyiv on Thursday. This occurred as US President Donald Trump urges both nations to come to the negotiating table to end the three-year conflict. “Now the signals from Russia are simply, to be honest, indecent," Ukrainian President Volodymyr Zelenskiy told Reuters.
Earlier this week, US President Trump met with Ukrainian President Zelenskiy to discuss potential concessions for ending the war in Ukraine, following his meeting with Russian leader Vladimir Putin on August 15.
Technical Analysis: GBP/USD Outlook
The Pound Sterling is currently trading near 1.3400 against the US Dollar on Friday. The near-term trend for the GBP/USD pair has turned uncertain, having fallen below the 20-day Exponential Moving Average (EMA), currently around 1.3450. The 14-day Relative Strength Index (RSI) is trending downwards towards 40.00. A fresh bearish momentum could develop if the RSI breaks below this level. On the downside, the August 11 low of 1.3400 is expected to act as a crucial support zone. Conversely, the July 1 high near 1.3790 represents a significant resistance level.
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 currency in the foreign exchange (FX) market, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘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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