Pound Sterling rises as traders expect BoE to follow gradual policy-easing path
- The Pound Sterling rises as investors expect that the policy-easing cycle of the BoE will be slow and shallow.
- Investors await speeches from BoE MPC members Dhingra and Lombardelli for fresh interest rate guidance.
- The US Dollar weakens following the announcement that Donald Trump has chosen Scott Bessent as Treasury Secretary.
The Pound Sterling (GBP) bounces back strongly at the start of the week and outperforms its major peers after facing a sharp sell-off on Friday. The British currency declined on Friday after the United Kingdom (UK) Retail Sales contracted at a faster-than-expected pace in October and the flash S&P Global/CIPS Composite Purchasing Managers’ Index (PMI) for November came in below the 50.0 threshold for the first time since October 2023.
Monthly Retail Sales declined by 0.7% as retailers reported that shoppers held back on spending ahead of the new government's first tax and spending budget on Oct. 30, according to the Office for National Statistics (ONS).
Meanwhile, the Composite PMI fell below the 50.0 level that separates expansion from contraction as activity in the manufacturing sector declined and the service sector output stagnated. “The first survey on the health of the economy after the Budget makes for gloomy reading”, said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
The major reason for the recovery in the Pound Sterling appears to be firm market expectations that the Bank of England (BoE) could be one of the central banks from Western nations that will follow a more gradual policy-easing path. Traders expect the BoE to leave interest rates unchanged at 4.75% in the December meeting and prices in 75 basis points (bps) cut to 4% by 2025, Reuters reports.
In Monday’s session, investors will focus on speeches from BoE Deputy Governor Clare Lombardelli and external policy member Swati Dhingra for fresh guidance on interest rates.
Daily digest market movers: Pound Sterling opens strongly against US Dollar
- The Pound Sterling opens strongly against the US Dollar (USD) on Monday, trying to extend its recovery above the round-level resistance of 1.2600. The GBP/USD gains as the US Dollar starts the week on a negative note, with the US Dollar Index (DXY) trading 0.5% down near 107.00.
- 10-year US Treasury yields plummet to near 4.33% as investors digest President-elect Donald Trump picking Scott Bessent as Treasury Secretary to oversee economic and tax policies. Contrary to market reaction, some analysts seem to be satisfied with the appointment: “There was some level of anxiety priced in that Trump was going to pick someone who was not good or some kind of absolute tariff fanatic, so this is a very good answer for Wall Street,” analysts at Tallbacken Capital Advisors said.
- Bessent said in an interview with the Wall Street Journal (WSJ) that he would focus on putting tariffs into action, cutting spending, and maintaining the status of the Greenback as the world's reserve currency.
- Upbeat flash S&P Global PMI data for November released on Friday showed an improved economic outlook in the United States. The Composite PMI rose at a faster pace to 55.3, the highest in 31 months, as contraction in the manufacturing sector lost steam and there was a faster-than-expected expansion in the services sector.
- Traders are divided over the Federal Reserve’s (Fed) action in the December monetary policy meeting. The probability of the Fed cutting interest rates by 25 bps to 4.25%-4.50% in December is at 56%, according to the CME FedWatch tool, while the remaining 44% expects rates to remain unchanged.
Technical Analysis: Pound Sterling recovers from 1.2500
The Pound Sterling rebounds after sliding below the psychological support of 1.2500 against the US Dollar. The GBP/USD pair recovers but market participants could use this rebound to build fresh shorts as the overall trend remains bearish, with 200-day Exponential Moving Average (EMA) trading near 1.2800.
The 14-day Relative Strength Index (RSI) rebounded after turning oversold but remains inside the 20.00-40.00 range, keeping the downside momentum intact.
Looking down, the pair is expected to find a cushion near May’s low of 1.2446. On the upside, the November 20 high at around 1.2715 will act as key resistance.
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.