Pound Sterling stabilizes ahead of UK GDP as Fed rate cut speculation intensifies
- The Pound Sterling trades calmly against its major peers as investors await the UK Q2 GDP data, to be released on Thursday.
- UK firms have been reluctant to increase hiring after the increase in employers’ contributions to social security schemes.
- Traders raise Fed’s interest rate cut bets for the September meeting after the release of fresh US inflation data.
The Pound Sterling (GBP) trades broadly stable against its major peers on Wednesday, in a calm day for markets as investors await the preliminary United Kingdom (UK) Q2 Gross Domestic Product (GDP) data, which will be released on Thursday.
Economists expect the UK economy to have grown at a marginal pace of 0.1%, much lower than the 0.7% expansion seen in the previous quarter. On year, the economy is seen rising by 1%, less than the Bank of England’s (BoE) projections of 1.25% announced in the monetary policy outcome last week. In the first quarter of the year, the economy grew at an annual pace of 1.3%.
Weakening GDP growth would add further pressure to Bank of England (BoE) officials at a time when they are worried about elevated inflationary pressures. Last week, the BoE also raised one-year forward Consumer Price Index (CPI) projections to 2.7% from 2.4%.
Meanwhile, cooling labor market conditions due to an increase in employers’ contributions to social security schemes is also a major concern for BoE policymakers. The latest labor market report showed that the estimated number of vacancies fell by 44K to 718K in the quarter from May to July. The early estimate of payrolled employees for July decreased by 8,000 on the month.
According to the report, feedback from the vacancy survey suggested that some firms may not be recruiting new workers or replacing workers who have left.
Daily digest market movers: Pound Sterling strengthens against US Dollar
- The Pound Sterling holds onto Tuesday’s gains slightly above 1.3500 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair extends gains as the US Dollar faces selling pressure, following the increase in traders’ bets supporting interest rate cuts by the Federal Reserve (Fed) in the September policy meeting.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades cautiously near a two-week low around 98.00.
- According to the CME FedWatch tool, the probability of the Fed to cut interest rates in the September meeting has increased to 94% from around 86% recorded on Monday.
- Traders raise Fed dovish bets after the US CPI report didn’t show any signs of a significant pass-through of the impact of tariffs into prices. Inflation rose almost in line with expectations: headline inflation grew at a steady pace of 2.7% on year, lower than expectations of 2.8%. The core CPI – which excludes volatile food and energy items – rose at a faster pace of 3.1% compared to expectations of 3% and the prior reading of 2.9%.
- Contrary to market expectations, some analysts believe that the September rate cut is not certain as there is one more employment and inflation data before the monetary policy meeting next month. "As the last payroll shows, one report can be sufficient to move the policy debate to one side or another. So, we think we still have to wait until the remaining data to print before making a strong case about a rate cut or a hold decision," analysts at Commonwealth Bank of Australia said.
- In Wednesday’s session, investors will focus on speeches from Richmond Fed President Thomas Barkin, Atlanta Fed President Raphael Bostic, and Chicago Fed President Austan Goolsbee for fresh cues on the US monetary policy outlook.
Technical Analysis: Pound Sterling trades firmly above 1.3500
The Pound Sterling holds onto gains around 1.3520 against the US Dollar on Wednesday. The near-term trend of the GBP/USD pair is bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades around 1.3425.
The 14-day Relative Strength Index (RSI) approaches 60.00. A fresh bullish momentum would emerge if the RSI breaks above this level.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3790 will act as a key barrier.
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.