- The Pound Sterling is broadly sideways around 1.3580 against the US Dollar ahead of Fed-BoE monetary policy announcements this week.
- Investors expect both central banks to hold interest rates steady.
- Investors remain on their toes as tensions between Israel and Iran have escalated.
The Pound Sterling (GBP) ticks up to near 1.3590 against the US Dollar (USD) so far on Monday, remaining inside Friday’s trading range. The GBP/USD pair is expected to keep trading within a tight range as investors have sidelined ahead of monetary policy announcements by the Federal Reserve (Fed) and the Bank of England (BoE), due on Wednesday and Thursday, respectively.
At the start of the week, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges down to near 98.00.
Investors will closely monitor the interest rate guidance from both central banks, while they are expected to leave those unchanged at their current levels.
Fed officials have stated that interest rates should remain in the current range of 4.25%-4.50% for a longer time until they get clarity about how the imposition of new economic policies by United States (US) President Donald Trump will influence inflation and impact economic growth. Policymakers have warned that Trump’s agenda could prove to be inflationary for the economy.
In the Fed’s monetary policy announcement, investors will pay close attention to the dot plot, which shows where policymakers see interest rates heading in the near and long term.
Daily digest market movers: Pound Sterling rises against its major peers
- The Pound Sterling trades higher against its major peers on Monday, with investors awaiting the BoE’s interest rate announcement. The United Kingdom (UK) central bank is expected to leave borrowing rates steady at 4.25% on Thursday as officials guided a “gradual and careful” monetary-expansion approach, following a 25-basis-points (bps) interest rate reduction in May’s policy meeting.
- Financial market participants doubt that the BoE will retain its “gradual and careful” policy easing guidance as the latest employment data for the three-month period ending April showed cracks emerging in the job growth pace.
- UK business owners slowed down their hiring pace to offset the impact of an increase in their contribution to the social security scheme, which became effective in April. In the UK Autumn Statement, Chancellor of the Exchequer Rachel Reeves announced an increase in employers’ contribution to National Insurance (NI) to 15% from 13.8%.
- Ahead of the BoE monetary policy, investors will also focus on the UK Consumer Price Index (CPI) data for May, which is scheduled to be released on Wednesday. The UK CPI report is expected to show that price pressures grew at a moderate pace.
- On the global front, escalating geopolitical tensions in the Middle East are likely to limit investors’ appetite for risk-sensitive assets, such as the Pound Sterling. Israeli Defence Minister Israel Katz has threatened to accelerate attacks on Iran if Iran continues firing missiles at Israel, Euronews reported. “Tehran will burn if it keeps launching attacks on Israel,” Katz said. Meanwhile, Iran has threatened to choke off the Strait of Hormuz, the world’s most important gateway for Oil shipping, Reuters reported.
Technical Analysis: Pound Sterling consolidates below 1.3600
The Pound Sterling is broadly sideways below 1.3600 against the US Dollar on Monday. The near-term trend of the GBP/USD pair remains bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3500.
The 14-day Relative Strength Index (RSI) struggles to break decisively above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.
On the upside, the 13 January 2022 high of 1.3750 will be a key hurdle for the pair. Looking down, the horizontal line plotted from the September 26 high of 1.3434 will act as a key support 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.