Pound Sterling remains on backfoot ahead of Fed-BoE policy meetings

Pound Sterling remains on backfoot ahead of Fed-BoE policy meetings

Time Stamp: January 31, 2024 2:54 AM
Source Node: 3089855

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  • The Pound Sterling drops amid uncertainty over the Fed and theBoE monetary policy meetings.
  • The Fed and the BoE are widely expected to leave interest rates unchanged.
  • UK business optimism improves due to soft inflation outlook and expectations of upcoming rate cuts.

The Pound Sterling (GBP) remains under pressure on Wednesday’s European morning as markets brace for the US Federal Reserve’s (Fed) monetary policy meeting. Investors see the Fed leaving interest rates unchanged in the range of 5.25%-5.50%, shifting their focus towards any  guidance about when the central bank will start cutting interest rates and at which speed. In its last monetary policy meeting, the Fed projected a 75-basis-points (bps) reduction in interest rates in 2024.

The GBP/USD pair trades broadly sideways, but a defined action is expected after the Fed and Bank of England (BoE) announce their first monetary policy decisions of 2024. The BoE is also expected to maintain the status quo for the fourth time in a row. Price pressures in the United Kingdom economy have peaked now, but  investors lack confidence about inflation returning to the 2% target in a sustainable manner.

Apart from the Fed decision, market volatility is expected to increase later this Wednesday as investors will focus on the US Automatic Data Processing (ADP) Employment Change data for January. This will be followed by the Institute of Supply Management (ISM) Manufacturing PMI and Nonfarm Payrolls (NFP) data, which will be published on Thursday and Friday, respectively.

Daily digest market movers: Pound Sterling falls while USD Index advances on risk-off mood

  • The Pound Sterling remains under pressure as the market mood is quite cautious ahead of the interest rate decision by the Federal Reserve.
  • The Fed is anticipated to maintain status-quo, suggesting there is no rush for delivering a dovish signal as inflation in the United States economy is still far from the desired rate of 2%.
  • The progress in inflation declining towards the 2% target has slowed as labor market conditions are strong, consumer spending is robust, and the economy is growing at a stronger pace.
  • Further moves in the Pound Sterling will also be driven by the Bank of England’s monetary policy decision, which will be announced on Thursday.
  • Like the Fed, the BoE is expected to deliver a steady interest rate decision for the fourth straight time, leaving interest rates unchanged at 5.25%.
  • As an unchanged monetary policy decision is widely anticipated, market participants will majorly focus on the interest rate outlook.
  • Unlike the Fed and the European Central Bank (ECB), BoE policymakers have not discussed the timing or scope of interest rate cuts in 2024. Therefore, discussions about rate cuts would be considered as bearish for the Pound Sterling.
  • The reasoning behind BoE’s emphasis on keeping interest rates at the current levels is elevated inflation, which is higher in the UK in comparison with other members of the Group of Seven economies.
  • Meanwhile, vulnerable economic growth could be a factor that will force BoE policymakers to discuss rate cuts.
  • The Lloyds Bank Business Barometer rose to a two-year high of 44% amid hopes of softer inflation and interest rate cuts. The survey showed that businesses are planning to increase their workforce ahead.
  • Meanwhile, the US Dollar Index (DXY) rises as the appeal for safe-haven assets improves ahead of the Fed’s decision.
  • Apart from the Fed’s policy decision, investors will focus on the ADP Employment Change data for January, which will be published at 13:15 GMT. Investors anticipate that US private employers hired 145K job-seekers, lower than 164K payroll additions in December.

Technical Analysis: Pound Sterling remains below 1.2700

Pound Sterling faces a sell-off ahead of the Fed’s interest rate policy. The GBP/USD pair continues to face pressure near the round-level resistance of 1.2700. The Cable has been stuck in a tight range between 1.2640-1.2775 during the last two weeks. 

A descending triangle formation is visible on the daily timeframe, which indicates that investors are on the sidelines. The horizontal support of the aforementioned chart pattern is plotted from the December 21 low at 1.2612, while the downward-sloping trendline is placed from the December 28 high at 1.2827. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates a lackluster move ahead.

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, aka ‘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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