Created
: 2024.04.25
2024.04.25 17:04
The Pound Sterling (GBP) advances to near the psychological resistance of 1.2500 against the US Dollar (USD) in Thursday's London session. The GBP/USD pair capitalizes on expectations of an improvement in the United Kingdom's economic outlook and a decline in the US Dollar.
Investors' confidence in the UK economy's outlook improved after the preliminary PMI report from S&P Global/CIPS for April showed that new business volumes increased across the private sector as a whole. The agency also reported that the rate of growth of overall activity was the strongest since May 2023. However, the expansion was centred on the service sector, as manufacturers saw a moderate downturn in order books.
Despite the recent upturn, downside risks to Pound Sterling remain high as investors expect the Bank of England (BoE) will pivot to interest-rate cuts before the Federal Reserve (Fed) does so. Last week, BoE Governor Andrew Bailey said: "I expect next month's inflation number will show quite a strong drop." Bailey added that Oil prices haven't leaped as much as expected and that the effect of the Middle-East conflict "is less than feared."
The Pound Sterling extends its recovery to the crucial resistance of 1.2500 against the US Dollar. The GBP/USD pair moves sharply higher after finding strong buying interest near a five-month low of around 1.2300. The near-term outlook of the Cable is still bearish as the 20-day Exponential Moving Average (EMA) at 1.2509 is declining.
The 14-period Relative Strength Index (RSI) rebounds above 40.00, suggesting that a bearish momentum has concluded for now. However, the bearish bias remains intact.
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).
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.
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.
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.
Created
: 2024.04.25
Last updated
: 2024.04.25
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