Pound Sterling slumps as investors predict Bank of England rate cut before Federal Reserve action.

Pound Sterling falls to 1.2540 as investors expect the Bank of England (BoE) to cut interest rates ahead of any possible Fed action on this matter. UK interest rates are forecasted to remain steady at 5.25% after Thursday’s BoE meeting and investors anticipate cuts starting as soon as August from this institution.

Tuesday saw Pound Sterling (GBP) fall against the US Dollar (USD), as the latter extended its uptrend against six major currencies – with DXY rising further to reach 105.25.

Investors seem confident about the United States’ economic outlook despite recent signs of weakness seen in data such as lower labor demand, slower wage growth and the contracting Services PMI index in April. Given this performance of the economy overall, the Federal Reserve can take its time cutting interest rates relative to central banks of developed nations.

Still, poor US economic data have raised hopes that the Federal Reserve might cut interest rates at their September meeting. There remains uncertainty regarding timing; policymakers seem content with current monetary policy framework. John Williams of New York Fed said on Monday: “Eventually there’ll be rate cuts” but for now things were in “very good place”, reported by Reuters.

Daily digest of market movers: Pound Sterling comes under pressure ahead of Bank of England Policy Meeting

The Pound Sterling has experienced dramatic selling pressure near its round-level resistance of 1.2600 and as investors remain convinced of a greater likelihood that Bank of England rates would decrease faster than US Federal rates.
Financial markets anticipate that both the BoE and Fed will reduce rates in August/September respectively, which has provided consistent support to the US Dollar despite recent missed nonfarm payroll and services PMI data for April.
Investors will gain more clarity into the UK interest rate outlook from Thursday’s Bank of England Monetary Policy Decision announcement, widely anticipated to maintain interest rates at 5.25% for yet another consecutive time. Therefore, any commentary provided about interest rate outlook is more relevant for forecasting next move of Pound Sterling exchange rates.
BoE Governor Andrew Bailey expressed hope last month for headline inflation to return to its target rate of 2% by April, as well as being content with market expectations of two or three rate reductions this year.

Technical Analysis: Sterling faces selling pressure near 1.2600.

Pound Sterling steadies near 1.2550 and continues to drop after consolidating near its 200-day Exponential Moving Average (EMA), currently trading around 1.2520. Cable does not appear stable and near-term outlook remains ambiguous due to no stabilization above this point in time.

GBP/USD continues to experience selling pressure near the neckline of its daily Head and Shoulder chart pattern, after breaking below it on April 12. On this date, Cable saw an intense selloff after passing below this neckline which has its origin from December 8 low around 1.2500.

The 14-period Relative Strength Index (RSI) fluctuates within a range of 40.00-60.00, suggesting indecision among market participants.

Pound Sterling FAQs
The Pound Sterling (GBP) is one of the oldest currencies in existence (dating back to 886 AD), serving as official currency in Great Britain since 1707. As per 2022 data, GBP/USD trades at around 11% while key pairs include GBP/JPY or “Dragon”, which accounts for 3 percent, as well as EUR/GBP (2 percent). GBPs are issued by Bank of England.

The Bank of England’s monetary policy decisions have the biggest influence on the value of Sterling. BoE decisions depend on whether its primary goal of “price stability”, with inflation rates between 2-2%, has been achieved. At the core of its approach is an interest rate mechanism designed to curb inflation: when inflation becomes excessively high, the Bank of England seeks to curb it by raising interest rates, making accessing credit more costly for people and businesses alike. Higher interest rates generally benefit GBP as more attractive investment destinations; when inflation dips too far below targeted levels it indicates slow economic expansion; this prompts the BoE to consider cutting interest rates to provide cheaper credit to businesses investing in growth-generating projects and ultimately push GDP upward.

Data releases provide insight into the health of the economy and can have an effect on Pound Sterling (GBP) value. Indicators such as GDP, Manufacturing and Services PMIs and employment all play a part in shaping its direction; strong economic performance benefits Sterling both through increasing foreign investment as well as encouraging BoE interest rate rises to strengthen GBP even further; on the contrary if economic data proves disappointing then its value may decline further than otherwise expected.

Another significant data release for Pound Sterling is Trade Balance data. This indicator measures the difference between what a country earns through exports and imports during any given time frame; when producing highly sought-after exports, its currency will benefit due to increased foreign buyer interest for these goods, strengthening it further; conversely a negative net Trade Balance weakens it further.