Market Data 
- The Pound Sterling exhibits strength against the US Dollar on Fed rate-cut optimism.
- Investors remain divided over the Fed rate-cut size in September.
- UK wage growth declines further in three-months ending July.
The Pound Sterling (GBP) clings to gains above the psychological support of 1.3000 against the US Dollar (USD) in Wednesday’s London session. The GBP/USD pair posted on Tuesday fresh year-to-date highs near 1.3050 amid sheer weakness in the US Dollar.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, finds temporary support after sliding to near 101.30, the lowest level seen in more than seven months.
Market participants appear to be largely bearish on the Greenback amid firm speculation that the Federal Reserve (Fed) will start reducing interest rates in September. Investors seem to be convinced about the Fed pivoting to policy normalization next month, but are split over the size of its first interest rate cut after years of policy tightening.
For fresh cues over the interest rate path, investors await the Federal Open Market Committee (FOMC) minutes for the July meeting, which will be published at 18:00 GMT. In the monetary policy announcement, the Fed left its key borrowing rates unchanged in the range of 5.25%-5.50% but warned that the economic outlook is uncertain and that the Committee is vigilant to the risks to both sides of its dual mandate (inflation and employment).
Meanwhile, the major source for investors to get cues about the rate-cut path will the Fed Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium, which will take place from Thursday to Saturday (Powell’s speech is expected on Friday at 14:00 GMT). Fed Powell is less likely to provide a preset course but would confirm that the central bank is prepared to adjust the monetary policy stance if risks emerge that could delay the attainment of the banks’ goals.
Daily digest market movers: Pound Sterling to be guided by BoE Bailey’s speech in Jackson Hole
- The Pound Sterling exhibits a mixed performance against its major peers on Wednesday, with investors focusing on the Bank of England’s (BoE) Governor Andrew Bailey’s speech at the JH Symposium on Friday. Andrew Bailey is expected to provide cues about whether the BoE will cut interest rates again in September.
- Market expectations for BoE interest rate cuts in September have increased after July’s United Kingdom (UK) Consumer Price Index (CPI) report showed that core inflation, which excludes volatile items, decelerated at a faster-than-expected pace to 3.3% from the estimates of 3.4%. Also, UK service inflation, the most closely-watched inflation measure by BoE officials, fell sharply to 5.2% due to easing wage pressures.
- Meanwhile, human resources data provider Brightmine reported that pay awards in the three months to July came in lower at 4.5% from the prior release of 5%. “Employers that have made pay awards so far this year have already reacted to the falling inflation environment by putting in place lower pay awards than made last year,” said Sheila Attwood, senior content manager at Brightmine, Reuters reported.
- On the economic data front, investors will look to the UK preliminary S&P Global Purchasing Managers’ Index (PMI) data for August, which will be published on Thursday. Economists estimate that flash Manufacturing PMI remained steady at 52.1, while activities in the service sector improved to 52.8 from the prior release of 52.5.
Technical Analysis: Pound Sterling refreshes annual high
The Pound Sterling posts a fresh annual high at 1.3050 against the US Dollar. The GBP/USD pair moves higher in a Rising Channel chart pattern in which each pullback is considered a buying opportunity by market participants. Upward-sloping 20-day Exponential Moving Average (EMA) near 1.2875 suggests that the near-term trend is bullish.
The 14-period Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting a strong upside momentum.
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.
