Market Data 
- The Pound Sterling trades in a tight range near 1.3400 against the US Dollar as investors await key US econmic data.
- Economists expect US Manufacturing activity to have contracted again in September.
- BoE MPC member Megan Greene said inflation could rise again due to a sharp recovery in consumption.
The Pound Sterling (GBP) consolidates in a tight range near the crucial resistance of 1.3400 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair struggles for direction as investors await the United States (US) labor market data, which will provide fresh cues about how much the Federal Reserve (Fed) will reduce interest rates further this year.
The Fed started the policy-easing cycle with an interest rate cut of 50 basis points (bps) to 4.75%-5.00% on September 18. Policymakers decided to opt for a larger-than-usual cut amid growing concerns over slowing job growth and as confidence increases about inflation returning to the bank’s target of 2%.
To get cues about current labor market health, investors will pay close attention to the US ADP Employment Change and Nonfarm Payrolls (NFP) data for September, which will be published on Wednesday and Friday, respectively.
On Monday, Fed Chair Jerome Powell pushed back market expectations of an aggressive rate-cut cycle. “This is not a committee that feels like it is in a hurry to cut rates quickly,” Powell said at the National Association for Business Economics conference. “If the economy evolves as expected, that would be two more cuts by year’s end, for a total reduction of half a percentage point more,” he added.
In today’s session, investors will focus on the US JOLTS Job Openings data for August and the ISM Manufacturing PMI data for September, which will be published at 14:00 GMT. Economists expect the job openings to have remained broadly steady in August compared to July at around 7.67 million.
Meanwhile, the ISM Manufacturing PMI is expected to improve slightly to 47.5 from 47.2. Still, the measure would suggest that activity in the factory sector continued to sink.
Daily digest market movers: Pound Sterling strengthens as BoE Greene spurts risks of inflation rising again
- The Pound Sterling outperforms its major peers on Tuesday. The British currency strengthens as market expectations for the Bank of England (BoE) to reduce interest rates in November have eased further after the speech from BoE external policy member Megan Greene at the National Association for Business Economics conference.
- Megan Greene, who voted for leaving interest rates unchanged in the last two policy meetings, indicated that the United Kingdom’s (UK) consumption-driven recovery could spurt price pressures again. Greene warned that the return of the headline inflation to the bank’s target of 2% was due to a temporary decline in Oil prices. Also, inflation in the service sector – which is closely tracked by BoE policymakers – at 5.6% is “worrisome,” she said. However, she remained confident that prices are “moving in the right direction,” Bloomberg reported.
- Financial market participants expect the BoE to cut interest rates one more time in the last quarter of the year, most probably in the December meeting. The BoE pivoted to policy normalization with a 25 bps interest rate cut on August 1 but left borrowing rates unchanged on September 19.
- Going forward, the next major trigger for the Pound Sterling will be the BoE Chief Economist Huw Pill’s speech, which is scheduled at 14:00 GMT. Pill’s speech could provide more guidance on the interest rate outlook for the remainder of the year.
- On the economic data front, investors will focus on the revised estimate of S&P Global/CIPS Manufacturing PMI data for September, which will be published at 08:30 GMT. The Manufacturing PMI is estimated to have remained at 51.5, unchanged from the flash estimate.
Technical Analysis: Pound Sterling turns sideways near 1.3400
The Pound Sterling trades sideways near the key resistance of 1.3400 against the US Dollar in European trading hours. The near-term outlook of the GBP/USD pair remains firm as the 20-day Exponential Moving Average (EMA) near 1.3250 is sloping higher.
The Cable is expected to remain firm as it holds the breakout of the trendline plotted from the December 28, 2023, high of 1.2828, delivered on August 21.
The 14-day Relative Strength Index (RSI) tilts down but remains above 60.00, suggesting an active bullish momentum.
Looking up, the Cable will face resistance near the psychological level of 1.3500. On the downside, the 20-day EMA near 1.3235 will be the key support for Pound Sterling bulls.
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.
