Pound Sterling moves higher ahead of flash UK-US PMI data
- The Pound Sterling climbs to near 1.2650 against the US Dollar ahead of the release of the flash PMI data for both the UK and the US.
- This week, investors will focus on monetary policy decisions from the Fed and the BoE as well as UK employment and inflation data.
- Traders price in an interest-rate reduction from the Fed while the BoE is expected to leave them unchanged.
The Pound Sterling (GBP) gains to near 1.2645 against the US Dollar (USD) in Monday’s London session. The GBP/USD pair rises as the US Dollar trades subdued, with the US Dollar Index (DXY) hovering around 107.00. Investors brace for a high level of volatility from the pair this week as both the Federal Reserve (Fed) and the Bank of England (BoE) are set for their last monetary policy meeting of the year on Wednesday and Thursday, respectively.
Divergent moves are expected from both the central banks as the Fed is widely anticipated to cut its key borrowing rates by 25 basis points (bps) to 4.25%-4.50%, while the BoE is expected to leave them unchanged at 4.75%. Still, as the main interest-rate decisions from both the central banks have already been priced in by market participants, investors will be majorly focusing on the policy outlook for 2025.
According to current market expectations, traders expect three interest rate cuts from both central banks in 2025.
This week, the Pound Sterling will also be influenced by the United Kingdom (UK) employment data for three months ending October and the Consumer Price Index (CPI) data for November, which will be released on Tuesday and Wednesday, respectively. Any sharp deviation in the labor market and inflation numbers from estimates could influence market speculation for the BoE interest rate action on Thursday and policy outlook expectations for 2025.
Daily digest market movers: Pound Sterling rises at start of Fed-BoE policy decisions week
- In Monday’s session, the Pound Sterling and the US Dollar will be guided by the flash S&P Global Purchasing Managers’ Index (PMI) data for the UK and the United States (US) for December. The UK PMI report is expected to show the overall business activity expanded at a slightly faster rate from the prior release of 50.5.
- UK Service PMI is estimated to have increased to 51.0 from 50.8. The Manufacturing PMI, which gauges activities in the factory sector, is expected to have risen to 48.1 from 48.0 in November. A mild improvement in the manufacturing sector output is unlikely to cheer market participants as a figure below 50.0 indicates that overall activity contracted.
- Market participants are already worried about the health of the UK manufacturing sector as data released on Friday showed that industrial and manufacturing production unexpectedly contracted in October.
- Investors will pay close attention to Tuesday’s labor market data to gauge hiring levels in the private sector after a recent survey by the UK Recruitment and Employment Confederation (REC) showed that an increase in employers’ contribution to National Insurance (NI) from 13.8% from 15% has led to dissatisfaction among employers.
- Meanwhile, the US flash PMI data is expected to show cooler growth in the overall business activity due to a slowdown in both the manufacturing and the services sector. Investors will look for cues about the impact of the election of Donald Trump as President on demand and inflation expectations.
Technical Analysis: Pound Sterling finds cushion near 1.2640
The Pound Sterling rises to near 1.2645 against the US Dollar on Monday after a three-day losing streak. The outlook of the GBP/USD pair remains bearish as all short-to-long Exponential Moving Averages (EMAs) are sloping lower.
Still, the upward-sloping trendline drawn from the October 2023 low around 1.2035 continues to provide support to Pound Sterling bulls near 1.2600.
The 14-day Relative Strength Index (RSI) hovers near 40.00. Should the RSI drop below 40.00, a bearish momentum will set off.
Looking down, the pair is expected to find a cushion near the psychological support of 1.2500. On the upside, the December 6 high of 1.2810 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.