Market Data 
- The Pound Sterling refreshes a weekly low near 1.2700 amid a risk-averse mood.
- The UK Inflation data will influence market expectations for BoE rate cuts in August.
- Investors see the Fed and the BoE holding interest rates at their current levels.
The Pound Sterling (GBP) continues its losing streak for the fourth trading session on Tuesday as investors turn risk-averse in a big central banks’ week. The GBP/USD pair prints a fresh weekly low ahead of the interest rate decisions by the Federal Reserve (Fed) and the Bank of England (BoE). As both central banks are anticipated to maintain the status quo, investors will majorly focus on clues about the interest rate outlook.
In the United Kingdom, investors will scrutinize the BoE’s monetary policy statement to look for any cues about the timing for interest-rate cuts. UK headline inflation has come down significantly from the double-digit figures to 4%, mainly because the BoE has raised and kept interest rates at high levels for more than two years. Maintaining higher interest rates has also led to a sharp decline in economic growth, uplifting expectations for rate cuts in August.
Before the BoE policy decision, market participants will focus on the UK Consumer Price Index (CPI) data for February, which will be published on Wednesday. Expectations for the BoE to lower interest rates sooner could escalate if the inflation data turns out softer than expected. On the contrary, stubborn data will deepen uncertainty over rate cuts. The Pound Sterling tends to strengthen when inflation data comes in higher than expected, suggesting BoE policymakers will maintain a hawkish narrative.
Daily digest market movers: Pound Sterling dips amid cautious market mood
- The Pound Sterling drops to the round-level support of 1.2700 as dismal market sentiment has dampened the appeal of risk-sensitive assets. The risk appetite of investors has diminished ahead of a slew of central bank meetings this week. “Investors are uncertain that the Fed will start cutting rates in June, as markets previously widely expected, due to recently hot inflation data. This has weakened the appeal for risk assets.
- The demand for safe-haven assets has improved significantly. The US Dollar Index (DXY), which measures the US Dollar’s value against six rival currencies, continues its winning streak for the fourth trading session on Tuesday. The USD Index jumped to 103.80 on hopes that the Fed will maintain hawkish rhetoric after keeping interest rates unchanged in the range of 5.25%-5.50% on Wednesday
- This week, the Pound Sterling will be guided by the Bank of England’s interest rate decision, which will be announced on Thursday. The BoE is widely anticipated to keep interest rates unchanged at 5.25%. Therefore, investors will keenly focus on cues about when the BoE is expecting to start reducing interest rates. Currently, the market expects the BoE to begin reducing interest rates in its August policy meeting.
- The market expectations for a rate cut in August are expected to be influenced by the United Kingdom CPI data for February, which will be announced on Wednesday. The annual headline inflation is forecast to have fallen to 3.6% against 4.0% in January. In the same period, core inflation – which excludes volatile food and energy prices – is forecast to have decelerated to 4.6% from 5.1%. For the monthly headline CPI, economists have forecasted a sharp growth of 0.7% after declining by by 0.6% in January.
Technical Analysis: Pound Sterling drops below 20-EMA to 1.2700
The Pound Sterling falls to the breakout region of the Descending Triangle formed around 1.2700. The near-term demand for the GBP/USD pair has turned uncertain as it has dropped below the 20-day Exponential Moving Average (EMA), which trades around 1.2730.
On the downside, the downward-sloping border of the Descending Triangle chart pattern could support the Pound Sterling. On the upside, a seven-month high at around 1.2900 will be a major barricade.
The 14-period Relative Strength Index (RSI) returns to the 40.00-60.00 range, indicating a sharp volatility contraction.
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.
