Pound Sterling gains on BoE Greene’s hawkish interest rate guidance
- The Pound Sterling rises against the majority of its peers as BoE’s Greene attributed soft volatile components to the decline in UK inflation in September.
- Investors await BoE Bailey’s speech and flash S&P Global/CIPS PMI data for October.
- The IMF has upwardly revised US growth projections for the current and the next year.
The Pound Sterling (GBP) outperforms the majority of its peers, except the US Dollar (USD) and the Canadian Dollar (CAD), on Wednesday. The British currency gains on Bank of England (BoE) Monetary Policy Committee member Megan Greene’s slightly hawkish interest rate guidance in a discussion with the Atlantic Council think-tank on the sidelines of the International Monetary Fund’s (IMF) meeting on Tuesday.
“I think it's most likely that monetary policy must continue to bear down to bring inflation to target,” Greene said. When asked whether the recent drop in United Kingdom (UK) inflation will influence her vote in the monetary policy in November, Greene said that a sharp fall in inflation came from volatile components. Therefore, she would not put too much weight on them.
Investors should note that Greene was one of the four Monetary Policy Committee (MPC) members who voted to keep interest rates unchanged in August, in which the BoE reduced them by 25 basis points (bps) to 5%.
The next trigger for the Pound Sterling will be BoE Governor Andrew Bailey’s speech, which is scheduled at 18:45 GMT. Investors will pay close attention to get fresh cues about the likely monetary policy action in November and December. Meanwhile, traders have priced in another interest rate cut in November.
On the economic front, market participants will focus on the flash S&P Global/CIPS Purchasing Managers Index (PMI) data for October, which will be published on Thursday. The PMI report is expected to show that the overall business activity expanded at a modest pace.
Daily digest market movers: Pound Sterling weakens against US Dollar amid uncertainty over US elections
- The Pound Sterling stays below the psychological resistance of 1.3000 against the US Dollar in Wednesday’s London session. The GBP/USD pair faces pressure as the USD extends its upside on multiple tailwinds. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, jumps to near 104.35 and approaches the August high of 104.45.
- The appeal of the US Dollar as safe-haven has been strengthened by uncertainty over the United States (US) presidential elections on November 5. According to the Reuters/Ipsos polls, Vice President Kamala Harris leads a slight margin against former President Donald Trump.
- Market participants worry that the scenario of Trump winning the election will result in higher tariffs, which will have a significant impact on exports from the Eurozone, Canada, Mexico, China, and Japan, which are closed trading partners to the US.
- Also, firm expectations for a Federal Reserve’s (Fed) gradual policy-easing cycle in the remaining year and 2025 have also boosted the appeal of the US Dollar. Meanwhile, the IMF has raised US growth forecasts for this year to 2.8% compared to 2.6% projected in July. The agency has also raised Gross Domestic Product (GDP) projections for 2025 to 2.2% from prior expectations of 1.9%.
- For the current status of economic health, investors will focus on the Fed’s Beige Book, which summarizes economic conditions across 12 Fed districts and will be published at 18:00 GMT.
Technical Analysis: Pound Sterling remains below 1.3000
The Pound Sterling stays below the psychological level of 1.3000 in European trading hours. The outlook of the GBP/USD pair is bearish as it remains below the 50-day Exponential Moving Average (EMA), which trades around 1.3080.
The 14-day Relative Strength Index (RSI) slides near 40.00, signalling that a bearish momentum in underway.
Looking down, the upward-sloping trendline drawn from the April 22 low of 1.2300 will be a major support zone for Pound Sterling bulls near 1.2920. A downside move below the same would drag the pair toward the 200-day EMA, which trades around 1.2845. On the upside, the Cable will face resistance near the 20-day EMA around 1.3110.
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.