Pound Sterling advances as BoE interest-rate decision looms
- The Pound Sterling advances against most of its peers as the BoE is expected to keep borrowing rates steady at 4.75%.
- UK inflation has accelerated in the past two months, supporting the BoE's decision to keep interest rates steady.
- The Fed cut interest rates by 25 basis points to 4.25%-4.50% but delivered hawkish guidance for 2025.
The Pound Sterling (GBP) performs strongly against its major peers, except the Euro (EUR), ahead of the Bank of England’s (BoE) monetary policy decision, which will be announced at 12:00 GMT. The BoE is expected to leave interest rates unchanged at 4.75% with an 8-1 vote split. The Monetary Policy Committee (MPC) member who is expected to vote for a 25-basis points (bps) interest rate reduction is Swati Dhingra, who has been consistently supporting a more expansionary policy stance.
The BoE is almost certain to keep interest rates steady as inflationary pressures in the United Kingdom (UK) have accelerated in the last two months. The UK Consumer Price Index (CPI) data for November showed that annual headline inflation accelerated to 2.6%, as expected, from 2.3% in October. The core CPI—which excludes volatile items such as food, energy, alcohol, and tobacco—rose to 3.5% from the former reading of 3.3%.
Investors will pay close attention to BoE’s guidance on the policy outlook. "We think it's too early for the BoE to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated," analysts at Bank of America (BofA) said.
According to market expectations, the BoE is expected to cut interest rates three times in 2025.
On the economic data front, investors will focus on the UK Retail Sales data for November, which will be released on Friday. Retail Sales, a key measure of consumer spending, are expected to rise by 0.5% on month after declining by 0.7% in October.
Daily digest market movers: Pound Sterling gains against USD, but broader outlook remains bearish
- The Pound Sterling recovers to near 1.2660 against the US Dollar (USD) in Thursday’s London session after plunging to near 1.2560 on Wednesday. The GBP/USD pair rebounds as the US Dollar’s (USD) rally has paused after refreshing a two-year high. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, edges lower but holds the key support of 108.00.
- The Greenback soared as the Federal Reserve (Fed) signaled fewer interest rate cuts for 2025 after cutting them by 25 bps to 4.25%-4.50%. The Fed’s dot plot showed that policymakers see Federal Fund rates heading to 3.9% in 2025, upwardly revising the projections from the 3.4% estimated in September.
- Fed Chair Jerome Powell said at the press conference that economic strength gives the Fed the ability to approach rate cuts cautiously. When asked about the inflation outlook, Powell said he expects “inflation to continue to come down toward the 2% goal, on a 'sometimes bumpy' path”. Meanwhile, the Federal Open Market Committee (FOMC) has also raised core Personal Consumption Expenditure inflation (PCE) projections for 2025 to 2.5% from 2.2% in its latest economic projections.
- Analysts at Monex Europe expect the Fed to hold interest rates at their current levels at least through the first half of 2025.
Technical Analysis: Pound Sterling recovers from 1.2550
The Pound Sterling recovers sharply after refreshing a three-week low near 1.2555 against the US Dollar on Thursday. The GBP/USD pair rebounds as the upward-sloping trendline, which is plotted from October 2023 low around 1.2035, remains a key support zone below 1.2600.
The 14-day Relative Strength Index (RSI) hovers near 40.00. A breakdown below the same could trigger a downside momentum.
A death cross, represented by the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.2790, suggests a strong bearish trend in the long run.
Looking down, the pair is expected to find a cushion near the psychological support of 1.2500. On the upside, the 200-day EMA near 1.2815 will act as key resistance.
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.