- The British Pound is trading in a tight range near 1.3400 against the US Dollar as investors await key US economic data.
- Economists expect US manufacturing activity to have contracted again in September.
- BoE MPC member Megan Greene said inflation could rise again due to a strong recovery in consumption.
The British Pound (GBP) consolidates in a tight range near the crucial resistance of 1.3400 against the US Dollar (USD) in the London session on Tuesday. The GBP/USD pair struggles for direction as investors await United States (US) labor market data, which will provide new clues on how much further the Federal Reserve (Fed) will cut interest rates this year.
The Fed began the policy easing cycle with an interest rate reduction of 50 basis points (bps) to 4.75%-5.00% on September 18. Policymakers decided to opt for a larger-than-usual reduction amid growing concerns about slowing job growth and as confidence grows that inflation will return to the bank’s 2% target.
For clues on the current health of the labor market, investors will pay close attention to the ADP Employment Change and US Nonfarm Payrolls (NFP) data for September, due to be released on Wednesday and Friday, respectively.
On Monday, Fed Chair Jerome Powell rejected market expectations for an aggressive rate cut cycle. “This is not a committee that feels like it’s in a rush to cut rates quickly,” Powell said at the National Association of Business Economics conference. “If the economy evolves as expected, that would be two more cuts by the end of the year, for a total reduction of half a percentage point more,” he added.
In today’s session, investors will focus on the US JOLTS Job Openings data for August and the ISM Manufacturing PMI data for September, which will be released at 14:00 GMT. Economists expect job openings to have remained broadly stable in August compared to July, at around 7.67 million.
Meanwhile, the ISM Manufacturing PMI is expected to improve slightly to 47.5 from 47.2. Still, the move would suggest that activity in the manufacturing sector continued to slump.
Daily Market Summary: Sterling Strengthens as BoE’s Greene Warns of Risks of Rising Inflation
- The British Pound outperforms its major peers on Tuesday. The British currency strengthens as market expectations that the Bank of England (BoE) will cut interest rates in November have been reduced further after BoE policy outsider Megan Greene’s speech at the conference of the National Association of Business Economics.
- Megan Greene, who voted to leave interest rates unchanged at the last two policy meetings, indicated that the United Kingdom’s (UK) consumer-driven recovery could increase price pressures again. Greene warned that headline inflation’s return to the bank’s 2% target was due to a temporary drop in oil prices. Furthermore, inflation in the services sector, which is closely watched by BoE policymakers, at 5.6% is “worrying”, he said. However, she was confident that prices are “moving in the right direction,” Bloomberg reported.
- Financial market participants expect the BoE to cut interest rates once again in the final quarter of the year, probably at the December meeting. The BoE pivoted towards policy normalization with a 25bp rate cut on August 1, but left lending rates unchanged on September 19.
- Looking ahead, the next big trigger for the Pound will be BoE Chief Economist Huw Pill’s speech scheduled for 14:00 GMT. Pill’s speech could provide more guidance on the interest rate outlook for the rest of the year.
- On the economic data front, investors will focus on the revised estimate of S&P Global/CIPS manufacturing PMI data for September, due at 08:30 GMT. The manufacturing PMI is estimated to have remained at 51.5, unchanged from the preliminary estimate.
Technical Analysis: Sterling remains sideways near 1.3400
The British Pound is trading sideways near the key resistance of 1.3400 against the US Dollar in European trading hours. The short-term outlook for the GBP/USD pair remains firm as the 20-day EMA near 1.3250 is tilted higher.
The Cable is expected to hold firm as it maintains the breakout of the trend line drawn from the December 28, 2023 high of 1.2828, delivered on August 21.
The 14-day Relative Strength Index (RSI) is trending lower but remains above 60.00, suggesting active bullish momentum.
Looking up, Cable will face resistance near the psychological level of 1.3500. On the downside, the 20-day EMA near 1.3235 will be the key support for the British Pound bulls.
The British Pound FAQs
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency unit in the world, with 12% of all transactions and an average of $630 billion per day, according to 2022 data.
Its key currency pairs are GBP/USD, also known as “Cable”, which represents 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most important factor influencing the value of the Pound Sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on achieving its main objective of “price stability”, that is, a stable inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. This tends to be positive for the GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation is too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to make credit cheaper, so that companies borrow more to invest in projects that generate growth.
The published data gauges the health of the economy and may influence the value of the Pound sterling. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the Pound.
A strong economy is good for the British pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the Pound. Otherwise, if economic data is weak, the pound is likely to fall.
Another significant data 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 during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
