Pound Sterling remains under significant pressure in the European session on Monday as expectations of an early rate cut by the Federal Reserve diminish. The GBP/USD pair experiences a sharp decline following robust US Nonfarm Payrolls (NFP) data, which has tempered anticipations of a rate cut at the March monetary policy meeting. The robust US job creation figures, coupled with unexpectedly strong wage growth, signal persistent inflation pressures.
Adding to the complexity is the challenging scenario for Bank of England (BoE) policymakers, grappling with mounting fears of a technical recession in the UK economy. The UK Office for National Statistics (ONS) reported a 0.1% contraction in the revised Q3 Gross Domestic Product (GDP) estimates, raising concerns about the economy’s trajectory. The UK faces economic challenges as higher interest rates exacerbate the cost-of-living crisis, compelling businesses to operate with reduced capacity.
Daily Digest Market Movers: Pound Sterling Declines Sharply as US Dollar Index Hits Seven-Week High
- Pound Sterling drops sharply, nearing a seven-week low around 1.2600, reflecting weakened appeal for risk-perceived assets.
- The outlook for risk-sensitive assets worsens as strong US employment data prompts traders to scale back expectations of a Federal Reserve rate cut.
- January’s robust US labor market data reveals increased demand for workers, higher wage growth, and a strong business order book.
- The CME Group Fedwatch tool indicates a low likelihood of a rate cut at March’s monetary policy meeting, with a slightly above 57% chance for a cut in May.
- Despite the Bank of England adopting a seemingly more hawkish interest rate outlook than the Fed, Pound Sterling faces severe pressure.
- Investors anticipate potential interest rate cuts by BoE policymakers due to subdued economic performance and escalating geopolitical tensions.
- The UK’s economy teeters on the edge of a technical recession, with a 0.1% GDP contraction in Q3 2023 and anticipated subdued performance in Q4.
- BoE policymaker Swati Dhingra’s vote for a rate cut contrasts with support for a rate hike from policymakers Catherine Mann and Jonathan Haskel.
- The UK’s vulnerable economic prospects may lead BoE policymakers to consider easing interest rates in upcoming meetings.
- Investor focus shifts to the final S&P Global Composite and Services PMI for January, expecting stability from preliminary readings of 52.5 and 53.8, respectively.
Pound Sterling further weakens, approaching crucial support at 1.2600, with a bearish short-term outlook evident as the pair falls below the 20-day and 50-day Exponential Moving Averages (EMAs) at approximately 1.2687 and 1.2642. The Cable hovers near the horizontal support of the Descending Triangle chart pattern, extending from December 21’s low at 1.2612, while the downward-sloping trendline originates from December 28’s high at 1.2827. The 14-period Relative Strength Index (RSI) declines toward 40.00, suggesting potential support for the prevailing downside momentum.
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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.