Pound Sterling steadies above 1.2800 ahead of Fed Powell’s testimony

July 9, 2024 7:29 am

  • The Pound Sterling holds gains against the US Dollar with a focus on Fed Powell’s testimony.
  • BoE’s Haskel argued in favor of holding interest rates steady at their current levels.
  • This week, investors will pay close attention to the US CPI and UK factory data.

The Pound Sterling (GBP) ranges above 1.2800 against the US Dollar (USD) in Tuesday’s early London session. The GBP/USD pair turns quiet as investors await the Federal Reserve (Fed) Chair Jerome Powell’s semi-annual Congressional testimony, which is scheduled at 14:00 GMT. 

Fed Powell is expected to acknowledge some progress made on inflation and will remain data-dependent for rate cuts. Powell could continue to refrain from providing any timeframe for rate cuts and emphasize the need to keep interest rates higher until policymakers see inflation declining for months. However, he could also show some concerns over moderating United States (US) labor market strength

The overall appeal of the Cable is quite firm as market speculation for the Fed to begin reducing interest rates from the September meeting has deepened. According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that the probability of rate cuts in September has improved to 77% from 65.6% recorded a week ago. The expectations for early Fed rate cuts have been prompted by the US Nonfarm Payrolls (NFP) report for June, which indicated that the labor market has lost momentum.

This week, the major trigger for the US Dollar will be the US Consumer Price Index (CPI) data for June, which will be published on Thursday. The US CPI report is expected to show that the core inflation, which strips off volatile food and energy items, grew steadily by 0.2% and 3.4% on a monthly and annual basis, respectively. Signs of stalling progress or reverse in disinflation would dampen market expectations for Fed rate cuts in September, while soft figures will boost them.

Daily Digest Market Movers: Pound Sterling remains firm ahead of UK GDP data

  • The Pound Sterling exhibits a quiet performance against its major peers as investors shift focus to the United Kingdom’s (UK) monthly Gross Domestic Product (GDP) and the factory data for May, which will be published on Thursday. 
  • The UK economy is estimated to have expanded by 0.2% after remaining unchanged in April. Also, Manufacturing and Industrial Production are expected to have grown decently after contracting in April. 
  • On the monetary policy front, Bank of England (BoE) policymaker Jonathan Haskel advocated for holding interest rates at their current levels as price pressures in the job market remain firm. Haskel said, “I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” Reuters reported. Haskel remains concerned over high inflation in the labor market due to strong wage growth, which is roughly double what is required to tame price pressures.
  • Jonathan Haskel is one of the policymakers who voted longest for tightening the monetary policy further. Contrary to Haskel’s viewpoint, traders expect that the BoE will start reducing interest rates from the August meeting.
  • On the political front, the overall outlook of the Pound Sterling has remained firm as an outright majority by Keir Starmer-led Labour Party in UK parliamentary elections has brought political stability in the economy.

Technical Analysis: Pound Sterling aims for firm footing above 1.2800

The Pound Sterling trades close to a three-week high above 1.2800 in Tuesday’s late Asian session. The GBP/USD pair forms an inverted Head and Shoulder (H&S) chart pattern on a daily timeframe. The neckline is plotted near 1.2850. A breakout of the H&S formation results in a bullish reversal.

Advancing 20- and 50-day Exponential Moving Averages (EMAs) near 1.2725 and 1.2690, respectively, suggest that the overall trend is bullish.

The 14-day Relative Strength Index (RSI) climbs into the bullish range of 60.00-80.00. A sustained move above the same will keep the momentum towards the upside.

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.

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