Created
: 2024.05.03
2024.05.03 17:15
The Pound Sterling (GBP) rises to 1.2550 against the US Dollar (USD) in Friday's London session. The GBP/USD pair strengthens as financial markets see the Bank of England (BoE) reducing interest rates from the September meeting, more or less in line with expectations of the US Federal Reserve making a similar move. Earlier, investors were divided between the June or August meeting.
The speculation about the BoE pivoting to interest rate cuts has been postponed as investors remain worried about strong wage growth in the United Kingdom, which is feeding the core Consumer Price Index (CPI), the central bank's preferred inflation measure.
For the headline inflation, BoE Governor Andrew Bailey said he is confident that it will return to the desired rate of 2%. The next BoE's monetary policy decisionich will be announced on May 9, and markets expect the bank to hold interest rates steady at 5.25%. Investors will keenly focus on whether Andrew Bailey sticks to its statement that expectations for two or three rate cuts are reasonable this year, as stated in March's policy meeting.
The Pound Sterling extends its winning spell for the third trading day on Friday. The GBP/USD pair holds gains above the psychological support of 1.2500. The near-term outlook of the Cable is upbeat as it holds above the 20-day Exponential Moving Average (EMA), which trades around 1.2520. While the long-term outlook is uncertain as the asset has yet not delivered a decisive break above the 200-day EMA near 1.2555.
The pair continues to face pressure near the neckline of the Head and Shoulder pattern. On April 12, Cable witnessed an intense sell-off after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
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
: 2024.05.03
Last updated
: 2024.05.03
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