- Pound Sterling remains higher as market mood remains cheerful.
- The UK employment and inflation data will be the major triggers in the week ahead.
- January’s US inflation data will keep the US Dollar on its toes.
The Pound Sterling (GBP) clings to gains amid improved market sentiment in Monday’s European session. The GBP/USD pair is expected to remain volatile as investors await the United Kingdom employment and the United States Consumer Price Index (CPI) data on Tuesday.
UK Average Earnings will be in focus as Bank of England (BoE) Deputy Governor Sarah Breeden said last week that the longevity of higher interest rates will be based on how price pressures and wage growth data evolve.
If wage growth momentum remains strong, the BoE will need to keep interest rates elevated to combat inflation, which will actually be positive for Pound Sterling as higher interest rates attract more foreign capital inflows.
In today’s session, a speech from Bank of England Governor Andrew Bailey will be keenly watched, and could set a fresh tone for March’s monetary policy meeting. In the last monetary policy statement, Bailey pushed back on rate-cut expectations amid low confidence that inflation will soon return to its 2% target.
Daily Digest Market Movers: Pound Sterling rises on improved market mood
- Pound Sterling prints a fresh weekly high around 1.2650 ahead of a speech by Bank of England Governor Andrew Bailey.
- Last week, BoE Deputy Governor Sarah Breeden and Chief Economist Huw Pill said the focus is now on how long interest rates will remain restricted. They ruled out fears of further policy tightening.
- BoE policymakers, Jonathan Haskel and Catherine Mann warned that upside risks to price pressures supported the case for keeping interest rates restrictive for longer.
- The Pound Sterling is expected to remain volatile amid a data-packed week. Employment, inflation, quarterly Gross Domestic Product (GDP) and Retail Sales data are lined-up for release.
- Labor market data is scheduled for Tuesday. The Unemployment Rate for three months ending December is expected to drop to 4.0% from a former reading of 4.2%.
- Price pressures in the United Kingdom region are most stubborn in comparison with other Group of Seven economies due to higher wage growth and service inflation. Therefore, Investors will keenly focus on the Average Earnings data.
- Investors anticipate that wage growth excluding bonuses will decelerate to 6.0% in three months ending December against the former reading of 6.6%. In the same period, Average Earnings including bonuses are forecast to have grown at a slower pace of 5.7%.
- Slower wage growth momentum would offer some relief to BoE policymakers and will increase hopes of an early rate-cut.
- Meanwhile, the US Dollar Index (DXY) has discovered interim support near 104.00. The market mood is slightly upbeat despite United States inflation data for January looming large, which will be published on Tuesday.
- US headline inflation is forecast to have grown at a slower pace of 3.0% against 3.4% in December. In the same period, core inflation that excludes volatile food and Oil prices is forecast to have decelerated slightly to 3.8% from 3.9%.
- The appeal for the US Dollar would drop if the inflation data eases further.
Technical Analysis: Pound Sterling hovers near weekly high around 1.2630
Pound Sterling trades in a range of 1.2580-1.2640 from the past three trading sessions. The GBP/USD pair demonstrates a sharp volatility contraction ahead of the crucial economic events. The 50-day Exponential Moving Average (EMA) around 1.2630 is acting as a barricade for the Pound Sterling bulls.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a probable consolidation ahead.
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, 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.
Source: https://www.fxstreet.com/news/pound-sterling-hovers-near-weekly-high-in-a-data-packed-week-202402120755