Pound Sterling clings to gains on Fed’s less hawkish interest-rate guidance
- The Pound Sterling exhibits strength above 1.2500 as the Fed’s guidance on interest rates was slightly less hawkish than expected.
- Fed’s Chair Jerome Powell said he is still confident about a reduction in interest rates this year.
- The BoE is expected to hold interest rates steady at 5.25% for the straight sixth time at its May 9 meeting.
The Pound Sterling (GBP) capitalizes on cheerful market sentiment and holds gains above the crucial resistance of 1.2500 in Thursday’s London session. The GBP/USD pair is slightly down from its previous close of 1.2526, but clings to recent gains. This strength in the Cable is driven by a weaker US Dollar, which was battered by the Federal Reserve’s (Fed) guidance on interest rates, which was less hawkish than feared, after keeping them unchanged for the sixth straight time.
The commentary from Fed Chair Jerome Powell in the press conference after the monetary policy meeting showed that he still sees the central bank pivoting to interest rate cuts this year even though he remains worried over stalling progress in inflation declining to the 2% target. When asked about the Fed’s stance on interest rate cuts, Jerome Powell said that he expects inflation to fall over the course of the year, but that "my confidence in that is lower than it was."
About the inflation outlook, Fed Chair Jerome Powell said that price growth “is still too high," adding that "further progress in bringing it down is not assured and the path forward is uncertain."
Apart from the Fed’s less-hawkish outlook, the sharp decline in the pace of balance sheet tapering suggested that the central bank is still leaning towards quantitative easing.
Daily digest market movers: Pound sterling holds gains amid wobbling US Dollar
- The Pound Sterling climbs comfortably above the psychological resistance of 1.2500 against the US Dollar (USD) amid cheerful market sentiment. Significant gains posted by S&P 500 futures in the European session suggest an improvement in investors’ risk appetite. The appeal for risk-perceived assets improves as investors took the Fed’s monetary policy statement and interest rate guidance from the press conference of Fed Chair Jerome Powell as less hawkish than expected.
- The indication that the Fed remains tilted towards unwinding quantitative tightening weighed heavily on the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near crucial support of 105.55 in the European session.
- Investors should brace for more volatility in the US Dollar as the United States Nonfarm Payrolls (NFP) and ISM Services PMI report for April are set to be released on Friday. Economists have forecasted that US employers hired 243K job-seekers in April, lower than the prior reading of 303K. The Services PMI is estimated to have increased to 52.0 from the prior reading of 51.4.
- In the United Kingdom, investors shifted focus to the Bank of England’s interest rate decision, which will be announced on May 9. The BoE is expected to hold interest rates steady at 5.25% for the sixth time in a row. Investors will keenly focus on the inflation outlook and cues about when the BoE will start reducing interest rates.
Technical Analysis: Pound Sterling trades sideways above 1.2500
The Pound Sterling trades in a narrow range above the crucial support of 1.2500. The GBP/USD pair continues to face pressure near the neckline of the Head and Shoulder pattern. On April 12, the Cable experienced an intense sell-off after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.
The long-term outlook of the Cable is uncertain as it struggles to sustain above the 200-day Exponential Moving Average (EMA), which trades around 1.2530.
The 14-period Relative Strength Index (RSI) oscillates within the 40.00 to 60.00 range, suggesting 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.