- Pound Sterling faces pressure as the BoE turns slightly dovish.
- BoE Bailey supports market expectations for rate cuts.
- Investors await the FOMC minutes for fresh guidance.
The Pound Sterling (GBP) struggles to hold onto gains in Wednesday’s European session after printing a fresh weekly high near 1.2670. The upside move in the GBP/USD pair on Tuesday was inconsistent with the pace at which the US Dollar fell due to slightly dovish commentary from Bank of England (BoE) Governor Andrew Bailey and other policymakers speaking before UK lawmakers at the UK parliamentary Treasury Select Committee.
Andrew Bailey said market expectations for rate cuts are not “unreasonable” and there are “encouraging signs” that price pressures are easing but refused to comment on the timing and degree of restrictive policy unwinding.
BoE Deputy Governor Ben Broadbent said the central bank’s focus has shifted from the degree of restrictive monetary policy to its duration. Meanwhile, BoE policymaker Swati Dhingra warned about downside risks of restrictive interest rates to the UK economy.
In today’s session, action in the Cable will be guided by the Federal Open Market Committee (FOMC) minutes, which will be published at 19:00 GMT.
Daily Digest Market Movers: Pound Sterling is slightly positive ahead of FOMC minutes
- Pound Sterling corrects gradually to 1.2625 as the US Dollar rebounds ahead of the Federal Reserve (Fed) minutes for the January policy meeting.
- The FOMC minutes will provide in-depth reasoning behind maintaining interest rates steady in the range of 5.25%-5.50%.
- The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, broadly remains on the backfoot as Fed policymakers are confident that inflation is moving in the right direction.
- The Pound Sterling fails to hold gains as Bank of England Governor Andrew Bailey and his teammates said rate cuts can be announced before inflation declines to their 2% target whilst speaking before the United Kingdom parliament’s Treasury Select Committee on Tuesday.
- Andrew Bailey denied to comment on the timing of rate cuts, however, he supported market expectations for the unwinding of historically restrictive interest rate stance.
- Bailey warned about inflation picking up again after returning temporarily to the desired target in spring. He said the BoE wants to achieve price stability sustainably.
- When asked about the economic outlook, Andrew Bailey said the technical recession in the second half of 2023 was historically modest, and an upturn is probably underway.
- Meanwhile, BoE Deputy Governor Ben Broadbent said the labor market is releasing some heat, which indicates that current monetary policy is sufficiently restrictive.
- Ben Broadbent added that the central bank has shifted its focus to the duration of holding interest rates at 5.25%, but rate cuts are not desirable at the current stage due to insufficient evidence.
- Broadbent’s view is based on data that indicates wage growth and service inflation are double the pace consistent with sustainable consumer price inflation.
- Going forward, the preliminary S&P Global/CIPS PMI data for February will guide further action in the Pound Sterling, which will be published on Thursday.
- The Manufacturing PMI is expected to come out below the 50.0 threshold at 47.5, higher than the former reading of 47.0.
Technical Analysis: Pound Sterling falls back from 1.2670
Pound Sterling faces pressure while attempting to recapture a two-week high of 1.2684. The GBP/USD pair is broadly sideways amid a Descending Triangle formation on a daily timeframe. The aforementioned chart pattern indicates a sharp contraction of volatility but with a slightly negative bias due to the formation of lower highs.
The downward-sloping border of the Descending Triangle pattern is plotted from December 28 high at 1.2827, while the horizontal support is placed from December 13 low near 1.2500.
The 20 and 50-day Exponential Moving Averages (EMAs) near 1.2630 continue to act as a barricade for the Pound Sterling bulls.
Meanwhile, 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating an indecisiveness among market participants.
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-struggles-to-recover-as-boe-shifts-focus-to-timing-of-rate-cuts-202402210748