- The Pound Sterling rises to near 1.2850 against the US Dollar as investors expect the US-China trade war to lead the US to a recession.
- US President Trump increased reciprocal tariffs on China to 104% against Beijing’s retaliation.
- Deutsche Bank expects the BoE to cut interest rates by 50 bps in May.
The Pound Sterling (GBP) extends the previous day’s recovery to near 1.2850 against the US Dollar (USD) in Wednesday’s European session. The GBP/USD pair advances as the US Dollar continues to face selling pressure amid firming expectations that the United States (US) could enter a recession this year. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, plummets to near 102.00.
A fresh escalation in the trade war between the US and China has prompted risks of a recession in the US. On Tuesday, US President Donald Trump signed an order to increase tariffs on China to 104%, following Beijing’s retaliation on his reciprocal tariffs. Trump also blamed China for currency manipulation to offset the impact of higher duties.
Last week, China increased the levy on imports from the US by 34% in retaliation to similar reciprocal tariffs imposed by Trump on the Liberation Day.
Additionally, accelerating Federal Reserve (Fed) dovish bets due to increasing risks of a US recession have also weighed on the US Dollar. According to a CME FedWatch tool, the central bank’s probability of cutting interest rates in May has increased to 52.5% from 10.6% recorded a week ago.
For more cues on the monetary policy outlook, investors will focus on the Federal Open Market Committee (FOMC) minutes of the March policy meeting, which will be published at 19:00 GMT. In the policy meeting, the Fed left interest rates steady in the range of 4.25%-4.50%, and officials collectively maintained their guidance for two interest rate cuts this year.
This week, investors will also focus on the US Consumer Price Index (CPI) data for March, which will be released on Thursday.
Daily digest market movers: Pound Sterling remains on tenterhooks
- The Pound Sterling shows a volatile performance against its major peers on Wednesday. Investors brace for more volatility ahead as protectionist policies by US President Trump have stemmed the risks of a global recession. Analysts at JPMorgan believe the rapid escalation with US tariffs on China is disruptive enough to push the global economy into a recession.
- China is known as the world’s manufacturing hub, given its competitive advantage in labor cost and supportive government policies. Financial market participants worry that Chinese firms will look for other markets to sell their products if its trade war with the US brews further. Such a scenario will be unfavorable for Europe as it seems incapable of battling a price war against China.
- Additionally, traders have raised Bank of England (BoE) dovish bets amid fears that Trump’s tariff policy could send shockwaves through the United Kingdom (UK) economy. Analysts at Deutsche Bank expect that the BoE may consider a more “forceful” response to current economic conditions and deliver a larger-than-usual interest rate cut of 50 basis points (bps) in the May policy meeting. The central bank identified a substantial decline in survey activity indicators, unwarranted tightening of financial conditions, and fears of labor market slowdown as key reasons behind the BoE’s ultra-dovish decision.
- This week, investors will focus on the monthly Gross Domestic Product (GDP) and the factory data for February, which will be released on Friday. The UK economy is expected to have grown by 0.1% after contracting at a similar pace in January.
Technical Analysis: Pound Sterling climbs above 1.2800
The Pound Sterling rises above 1.2800 against the US Dollar on Wednesday but struggles to reclaim the 20-day Exponential Moving Average (EMA), which trades around 1.2877.
The 14-day Relative Strength Index (RSI) rebounds after falling to near 40.00. A fresh bearish momentum could be triggered if the RSI fails to hold the 40.00 level.
Looking down, the 38.2% Fibonacci retracement plotted from late September high to mid-January low near 1.2610 will act as a key support zone for the pair. On the upside, the psychological figure of 1.3000 will act as a key resistance zone.
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, 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.
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