Investors see the BoE pivoting to interest rate cuts in the June or August meeting.
The Fed’s policy decision on Wednesday and the NFP report on Friday will be the key events this week.
The Pound Sterling (GBP) prints a fresh two-week high against the US Dollar (USD) near 1.2550 in Monday’s London session. The GBP/USD pair advances due to cheerful market sentiment and a decline in the US Dollar. The Cable strengthens as mixed guidance from Bank of England (BoE) policymakers over the inflation outlook increases uncertainty about when the BoE will start its interest rate cuts cycle.
BoE Deputy Governor Dave Ramsden said in mid-April that the risks of inflation remaining elevated have receded. Ramsden predicted headline inflation would return to the 2% target in May and said it would likely remain at this level for the next two years.
On the contrary, a few other BoE policymakers, such as Chief Economist Huw Pill, Jonathan Haskel, and Catherine Mann, aren’t that optimistic about the inflation outlook. Most of them have referred to the core Consumer Price Index (CPI) as the preferred measure for decision-making on interest rates, which is still high due to stubborn service inflation. Last week, Pill said: “Time for cutting bank rate remains some way off.”
Financial markets are expecting that the BoE will pivot to rate cuts in the June or August meeting. “It is between June and August, and we are leaning slightly towards August on the basis that one of the key things the BoE is looking at is service inflation,” said James Smith, an economist at ING Financial Markets. “If services inflation is a little bit stickier, I think that tilts the balance a little bit further towards August over June, but it’s a pretty close call, to be honest”, he added.
The Pound Sterling rallies to 1.2550, capitalizing on improved market sentiment. S&P 500 futures have posted significant gains during the Asian session, suggesting an improvement in investors’ risk appetite. A slight decline in the US Dollar ahead of the Federal Reserve’s interest rate decision has also boosted the GBP/USD pair. However, firm expectations that the Fed will maintain the hawkish tone could support the US Dollar.
The Fed is widely anticipated to hold interest rates steady in the range of 5.25%- 5.50% in its monetary policy meeting on Wednesday. Fed policymakers are expected to remain data-dependent for further decisions. The central bank will likely reiterate the need to gain more confidence before pivoting to rate cuts.
A recent batch of consumer inflation data has not offered any relief to Fed policymakers. The United States core Personal Consumption Expenditure Price Index (PCE) data for March, released on Friday, indicated that higher service prices kept price pressures hotter than expected.
Annually, the core PCE inflation data rose by 2.8%, higher than expectations of 2.6% and at the same pace as in February. The monthly inflation data grew parallel with the consensus and the prior release of 0.3%. The 0.3% growth in monthly core PCE is higher than needed for inflation to return to the desired rate of 2%.
Apart from the Fed’s monetary policy decision, investors will also focus on the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) data for April, which will be published on Wednesday. The ISM Manufacturing PMI is estimated to remain above the 50.0 threshold, which separates expansion from contraction. The factory data is seen at 50.1, lower than the prior reading of 50.3. The PMI survey by S&P Global for the same period showed a sharp decline in the scale of production and new orders due to inflationary pressures, weak demand and sufficient stock holdings at customers.
Later this week, the US Nonfarm Payrolls (NFP) data will be the crucial event that will indicate the current status of the labor market.
The Pound Sterling recovers losses registered in the last weeks and hovers near the neckline of the Head and Shoulder chart pattern. The neckline of the above-mentioned pattern is plotted from December 8 low around 1.2500.
The GBP/USD pair attempts to sustain above the 20-day Exponential Moving Average (EMA), at around 1.2510. The 200-day EMA, at 1.2550, is acting as a major barrier for the Pound Sterling bulls.
The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting a consolidation ahead.
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.
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