- The British Pound is slightly higher against the US Dollar, but a decline in bets that the Fed will opt for a big rate cut keeps the bearish bias afloat.
- Investors see the BoE leaving interest rates unchanged at 5% at its September meeting.
- Market participants are awaiting the US PPI report for August.
The British Pound (GBP) is holding onto Wednesday afternoon’s recovery move from the psychological support of 1.3000 to near 1.3050 against the US Dollar (USD) in Thursday’s London session. However, the outlook for the GBP/USD pair is tilted to the downside as the US Dollar is holding on to gains near a fresh weekly high, with investors gaining confidence that the Federal Reserve (Fed) will begin the policy easing process with a 25 basis point interest rate cut.
The US Dollar Index (DXY), which tracks the greenback’s value against six major currencies, is holding onto gains near 101.70. Investors have been speculating for weeks about the size of the Fed’s next rate cut. Expectations for a small 25 basis point interest rate cut have strengthened after August Consumer Price Index (CPI) data, released on Wednesday, showed signs of some persistence in inflationary pressures.
Annual headline inflation was lower than anticipated. However, core inflation figures – which exclude volatile food and energy prices – remained persistent. Core inflation rose 3.2% as expected, but the monthly figure grew 0.3%, faster than the 0.2% anticipated.
US core inflation data significantly weighed on market expectations for large-sized Fed rate cuts. According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 50 basis points (bps) to 4.75%-5.00% in September has declined to 13% from 40% a week ago.
On Thursday, investors are looking forward to the US Producer Price Index (PPI) data for August and Initial Jobless Claims for the week ending September 6. Both reports will be released at 12:30 GMT.
Overall producer inflation data is expected to have eased further due to falling energy prices, while core figures are projected to have accelerated.
Daily Market Wrap: British Pound Staggers Against US Dollar
- The British Pound is higher against its major peers, excluding Asia-Pacific currencies, in European trading hours on Thursday. The British currency is higher as market participants seem confident that the Bank of England’s (BoE) policy easing cycle will be less aggressive than that of other central banks.
- According to a Reuters poll, the BoE is expected to leave interest rates unchanged at 5% next week but is expected to cut them again in November despite inflation remaining above the bank’s 2% target. Comments by BoE Governor Andrew Bailey at the Jackson Hole (JH) Symposium also indicated that the central bank will cut interest rates gradually to keep inflationary pressures at bay.
- An increase in market expectations for the BoE holding interest rates steady this month appears to be the result of robust job growth and a decline in the unemployment rate. In the three months ending in July, the unemployment rate fell to 4.1%, while UK employers hired 265,000 new workers, a significantly higher number than the previous release of 24,000.
- Looking ahead, the next big triggers for the Pound will be the UK Consumer Price Index (CPI) data for August and the BoE interest rate decision, which are scheduled for next week.
Technical Analysis: British Pound up slightly near 1.3050
The British Pound is up against the US Dollar near 1.3050, recovering from 1.3000. However, the short-term outlook for the Cable has turned gloomy as the pair’s price action falls below the trend line drawn from the December 28, 2023 high of 1.2828 – from where it delivered a strong upside move after a breakout on August 21. Moreover, a downside move below the 20-day exponential moving average (EMA) near 1.3070 has weakened the British Pound’s appeal.
The 14-day Relative Strength Index (RSI) falls in the 40.00-60.00 range, suggesting that the bullish momentum has concluded for now. However, the long-term uptrend remains intact.
Looking up, Cable will face resistance near the round-level at 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as a crucial support for the British Pound bulls.
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
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.
