The Pound Sterling (GBP) seems fragile near 1.3400 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair faces selling pressure as the US Dollar (USD) outperforms its major currency peers despite the United States (US) government entering its second week of shutdown.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.35% higher to near 99.00, the highest level seen in two months.
The US Dollar has attracted significant bids as recent political developments in Japan and France have increased its safe-haven demand. In Japan, the ruling conservative party has elected Sanae Takaichi as its new leader, who could become the first female Prime Minister (PM) of the country. Her election has dashed hopes of more interest rate hikes by the Bank of Japan (BoJ). Meanwhile, the French economy is facing deeper political crisis following the sudden resignation of PM Sebastien Lecornu.
On the domestic front, ongoing government shutdown is expected to be a major drag on the US Dollar, with US President Donald Trump threatening to cut welfare programs and laying-off federal jobs. Trump warned on Tuesday that the White House could roll back some of its programs, and added that he would provide details on lay-offs in federal agencies in the next four to five days, Reuters reported.
Daily digest market movers: Pound Sterling underperforms North American currency peers
- The Pound Sterling trades higher against its major currency peers, except North American currencies, on Wednesday. Investors expect the British currency to trade on sidelines amid uncertainty about whether the Bank of England (BoE) will cut interest rates again in the monetary policy meetings remaining this year.
- The uncertainty over BoE’s monetary policy outlook has increased as inflationary pressures in the United Kingdom (UK) economy are proving to be persistently higher, while labour demand is slowing.
- In September’s monetary policy meeting, the BoE held interest rates steady at 4% and retained its “gradual and careful” monetary easing approach. In Wednesday’s session, investors will focus on BoE Chief Economist Huw Pill’s speech scheduled at 15:00 GMT. Pill was one of seven Monetary Policy Committee (MPC) members, out of nine, who voted to keep interest rates steady.
- In the US, investors will focus on the release of the Federal Open Market Committee (FOMC) minutes for the September policy meeting due at 18:00 GMT. The FOMC Minutes will provide a detailed explanation about its decision to cut interest rates by 25 basis points (bps) to 4.00%-4.25%. This was the first rate cut by the Fed this year.
- Fed’s dot plot also showed that policymakers see Federal Funds Rate falling to 3.6% by the year-end, suggesting that there will be two more interest rate cuts this year. The CME FedWatch tool also shows that traders see an 82% chance that the central bank will cut interest rates by 25 basis points (bps) in each of its two policy meetings remaining this year.
Technical Analysis: Pound Sterling remains below 20-day EMA
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The Pound Sterling underperforms the US Dollar and drops to near 1.3400 on Wednesday. The GBP/USD pair remains below the 20-day Exponential Moving Average (EMA), which trades around 1.3468, suggesting that the near-term trend is bearish.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a sideways trend.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the September 17 high of 1.3726 will act as a key barrier.
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, also known as ‘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.
