untitled design

Sterling holds gains after Starmer’s landslide UK win and Fed rate cut prospects rise

  • The British Pound remains firm against the US Dollar as expectations of Fed rate cuts in September increase.
  • Keir Starmer’s historic victory in the UK parliamentary elections has brought political stability.
  • This week, investors will focus on UK monthly GDP for May and US CPI for June.

The British Pound (GBP) is exhibiting a mixed performance against its major peers in the London session on Monday. The short-term outlook for the British currency remains firm as the Keir Starmer-led Labour Party secured an outright majority against the Rishi Sunak-led Conservative Party in the UK parliamentary elections. The victory of the Labour Party with an outright majority has brought political stability to the economy, resulting in major strength in the UK financial markets.

Uncertainty over the Bank of England’s (BoE) interest rate outlook remains high despite annual headline inflation having returned to the desired rate of 2%. Financial markets currently see a 50% chance that the BoE will start cutting interest rates as early as the August meeting.

This week, investors will focus on the UK’s monthly gross domestic product (GDP) and industrial production data for May, due on Thursday. The UK economy is estimated to have expanded by 0.2% after remaining unchanged in April.

Daily Market Wrap: British Pound Clings to Gains Against US Dollar

  • The British Pound is holding gains near 1.2800 against the US Dollar (USD) in the European session on Monday. The GBP/USD pair is strengthening as the US Dollar is weakening following the United States (US) Non-Farm Payrolls (NFP) report for June, which pointed to subdued conditions in the labor market.
  • The US NFP report indicated that job hiring was not as strong in April and May as previously reported. A revised reading for the aforementioned months showed that the economy created 111,000 fewer jobs than previously estimated. The unemployment rate unexpectedly rose to 4.1% from estimates and the previous month’s 4.0%.
  • Signs of weakening labor market strength are raising expectations for early rate cuts by the Federal Reserve (Fed). Officials have reiterated that they want to see inflation decline for months before cutting interest rates. However, Fed Chairman Jerome Powell said last week that unexpected weakness in the labor market could force policymakers to react on interest rates sooner.
  • Also, Average Hourly Earnings, a measure of wage growth that drives services inflation and consumer spending, softened as expected on a monthly and annual basis.
  • According to the CME FedWatch tool, 30-day federal funds futures price data show the probability of rate cuts in September has risen to 75.8% from 64% a week ago. The data also show the Fed will make subsequent rate cuts at either the November or December meeting.
  • This week, investors will be paying close attention to the US Consumer Price Index (CPI) data for June, due out on Thursday. Economists see the annual core CPI, which excludes volatile food and energy prices, growing steadily by 3.4%.

Technical Analysis: British Pound hovers around 1.2800

The British Pound is trading near a fresh three-week high at 1.2820 against the US Dollar. The GBP/USD pair has risen above the 78.6% Fibonacci retracement level at 1.2770, drawn from the March 8 high of 1.2900 to the April 22 low of 1.2300.

The pair is rising above the 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2695 and 1.2675, respectively, which suggests that the near-term outlook is bullish.

The 14-day Relative Strength Index (RSI) is rising above 60.00. A sustained move above this level would shift momentum to the upside.

The British Pound 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 currency unit in the world, accounting for 12% of all transactions and an average of $630 billion a day, as of 2022.
Its key currency pairs are GBP/USD, also known as the “Cable,” which accounts for 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The British Pound is issued by the Bank of England (BoE).

The most important factor influencing the value of the British Pound 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”, i.e. a stable inflation rate of around 2%. Its main tool for achieving this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, making credit more expensive for individuals and businesses. This is generally 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 growth-generating projects.

The data released gauges the health of the economy and can influence the value of the Pound. 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 British Pound. Conversely, if economic data is weak, the British Pound is likely to fall.

Another significant indicator for the pound 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 who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

Source: Fx Street

You may also like

Get the latest

Stay Informed: Get the Latest Updates and Insights


Most popular