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Pound Sterling witnesses a significant demand as the BoE is expected to keep the restrictive policy longer.
A hawkish interest-rate outlook has deepened UK recession fears.
The US Dollar remains on the backfoot ahead of the US NFP data.
The Pound Sterling (GBP) prints a fresh weekly high in the early European session on Friday as the Bank of England (BoE) is expected to start reducing interest rates after the Federal Reserve (Fed) and the European Central Bank (ECB), and the risk-appetite of the market participants has improved.
Recent monetary policy statements from Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde, and Bank of England Governor Andrew Bailey indicated that the first two were more explicit about rate cuts. The Fed has already guided three rate cuts this year, and ECB’s Lagarde sees the central bank commencing the rate-reduction process in late summer.
Like Jerome Powell, Andrew Bailey avoided speculation on rate cuts and warned that price pressures could pick up again in the second half of this year. The BoE chose to tame high price pressures over facing-off deepening recession fears. The United Kingdom economy witnessed a decline in growth of 0.1% in the third quarter of 2023, and higher interest rates are expected to continue to place barriers to economic growth.
The GBP/USD pair clings to gains but could face volatility ahead as the United States Bureau of Labor Statistics (BLS) labor report – the Nonfarm Payrolls (NFP) release for January. Upbeat labor market data would trim hopes of a rate cut by the Fed in May.
Pound Sterling hovers near a weekly high of around 1.2750 after a sharp rally against the US Dollar as investors await the United States NFP report.
The likelihood for more upside in the Pound Sterling is high as the market sentiment is cheerful, and the Bank of England didn’t express much about interest rate cuts while providing forward guidance on interest rates in the monetary policy announcement on Thursday.
In the monetary policy statement, BoE Governor Andrew Bailey said that a victory cannot be announced on inflation because, although price growth is expected to fall to 2% in Q2 of 2024, it is expected to pick up again in Q3.
The BoE advocated keeping interest rates restrictive until they got enough evidence that inflation would sustainably return to the 2% target.
While Andrew Bailey refrained from endorsing further quantitative tightening, policymakers Jonathan Haskel and Catherine Mann voted for a rate hike by 25 basis points (bps). BoE Swati Dhingra voted for a rate cut of the same size.
Higher interest rates are expected to worsen the UK’s labor market conditions further. In the latest projections report, the BoE sees the Unemployment Rate rising to 5% by the end of 2026.
The outlook for the UK economy is more vulnerable now as longer restrictive monetary policy could fade business optimism. Factories may refrain from fresh investment plans to avoid higher installment obligations.
Meanwhile, the US Dollar Index (DXY) faces a sharp sell-off amid hopes that the Fed will reduce interest rates in May, even though Chair Jerome Powell refused to speculate over rate cuts.
Jerome Powell said interest rates needed to remain higher until the Fed gets greater confidence that inflation will return to the 2% target sustainably.
In today’s session, market participants will focus on the US NFP report, which will be published at 13:30 GMT.
According to the estimates, US employers hired 180K workers in January, lower than 216K recruitments in December. The Unemployment Rate is expected to increase to 3.8% against the former reading of 3.7%.
Average Hourly Earnings data will be keenly watched apart from the labor numbers. This would provide a fresh outlook on inflation. Higher wage growth leads to an uptick in retail demand, which fuels price pressures.
Pound Sterling seems set to extend its rally towards the round-level resistance of 1.2800, supported by multiple tailwinds. The GBP/USD pair attempts a breakout of the Descending Triangle chart pattern formed on a daily time frame. The downward-sloping trendline of the aforementioned chart pattern is placed from 28 December 2023 high at 1.2827 while the horizontal support is plotted from 21 December 2023 low at 1.2612. A decisive breakout will result in wider ticks and high volume.
The 14-period Relative Strength Index (RSI) is approaching the 60.00 hurdle. If the RSI (14) manages to sustain above the aforementioned hurdle, it will reflect a bullish turn in market sentiment.
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.
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