Pound Sterling finds cushion as US Dollar takes a breather from recent rally
- The Pound Sterling attracts bids near 1.3230 against the US Dollar, struggling to extend its winning streak.
- Traders pare Fed interest-rate cut bets as Chairman Powell warns of upside inflation risks.
- Investors expect the BoE to cut interest rates next week.
The Pound Sterling (GBP) rebounds slightly to near 1.3270 against the US Dollar (USD) during the European trading session on Thursday, bouncing from an over two-month low of 1.3228 posted the previous day. The GBP/USD pair attracts bids as the US Dollar takes a breather after a five-day winning streak, but the broader outlook of. the Cable is bearish as the US Dollar remains broadly firm.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects slightly to near 99.60 from the two-month high around 100.00 posted on Wednesday.
The Greenback attracted significant bids on Wednesday after upbeat US Gross Domestic Product (GDP) and employment data, as well as Federal Reserve (Fed) Chair Jerome Powell’s support for keeping interest rates at their current levels. These forced traders to pare bets supporting interest-rate cuts by the Fed in the September meeting, supporting the US Dollar.
According to the CME FedWatch tool, the probability for the Fed to cut interest rates in September has fallen to 43.2% from 63.3% seen on Tuesday.
Powell signaled that monetary policy adjustments are inappropriate as the economy is in a “solid position” and inflation is “somewhat above target”.
Daily digest market movers: Pound Sterling weakens against its peers
- The Pound Sterling underperforms against other major currencies, except North American peers, on Thursday. The British currency has traded broadly stable this week due to a light economic calendar in the United Kingdom (UK).
- Investors brace for significant volatility in the Pound Sterling ahead of the Bank of England’s (BoE) interest rate decision, which will be announced next week.
- Traders are increasingly confident that the BoE will reduce interest rates by 25 basis points (bps) to 4%.Still, the UK central bank might need to perform a delicate balancing act while discussing on interest rates amid escalating price pressures and cooling labor market conditions.
- The Latest economic indicators in the UK have signaled a slowdown in the hiring trend due to an increase in the employers’ contribution to social security schemes.
- Going forward, the GBP/USD pair will be influenced by the US Nonfarm Payrolls (NFP) and the ISM Manufacturing PMI data for July, which is scheduled to be released on Friday. Economists expect the US economy to have added 110K fresh workers in July, lower than the 147K jobs created in June. The ISM Manufacturing PMI is seen higher at 49.5 from 49.0 in June, suggesting that activity in the US factory sector continued to decline but at a modest pace.
- Washington has reached a trade agreement with one more of its key trading partners. On Wednesday, US President Trump announced a tariff deal with South Korea by which the US will charge 15% tariffs on Korean imports. The baseline tariff rate is lower than the 25% threatened by Trump at the start of the month.
Technical Analysis: Pound Sterling finds temporary support near 1.3230
The Pound Sterling finds cushion near a over two-month low at around 1.3230 against the US Dollar on Thursday. However, the outlook of the GBP/USD pair remains bearish as it has broken down below the neckline of a bearish Head and Shoulder (H&S) chart pattern. The neckline of the H&S formation is plotted around 1.3370.
The downward-sloping 20-day Exponential Moving Average (EMA), near 1.3442, suggests that the near-term trend is bearish.
The 14-day Relative Strength Index (RSI) oscillates well below 40.00, almost reaching oversold levels, indicating that a bearish momentum is intact.
Looking down, the May 12 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 will act as a key barrier.
Pound Sterling FAQs
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, 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).
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.