- The Pound Sterling wobbles against its peers ahead of the flash UK-UK PMI data for September.
- The UK Composite PMI is expected to come in lower at 52.7.
- Investors await Fed Powell’s speech for fresh cues on the monetary policy outlook.
The Pound Sterling (GBP) trades broadly calm against its peers on Tuesday ahead of the preliminary United Kingdom (UK) S&P Global Purchasing Managers’ Index (PMI) data for September, which will be released at 08:30 GMT.
The PMI report is expected to show that the Composite PMI dropped to 52.7 from 53.5 in August, indicating that the overall business activity expanded, but at a moderate pace. A slowdown in the overall business activity growth came on the back of continued weakness in the manufacturing sector. The Manufacturing PMI is expected to have contracted at a steady pace of 47.0, with the Services PMI expanding at a moderate pace to 53.5 from 54.2 previously.
Signs of a slowdown in the overall business activity would weigh on the Pound Sterling, which has already been under pressure due to the worsening UK fiscal situation. Mounting UK public debt and surging Gilt yields are weighing on the economic growth outlook, paving the way for more taxes by the government in the release of the Autumn Budget in November.
Last week, the data showed that UK public sector net borrowing hit £18 billion, the highest level seen in five years.
Meanwhile, investors seek fresh cues about whether the Bank of England (BoE) will cut interest rates again in the policy meetings remaining this year. Last week, the BoE held interest rates steady at 4%, as expected, and retained a “gradual and careful” monetary easing approach.
Daily digest market movers: Pound Sterling wobbles against US Dollar
- The Pound Sterling consolidates around 1.3515 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD pair flattens as investors await the speech from Federal Reserve (Fed) Chair Jerome Powell at the Greater Providence Chamber of Commerce at 16:35 GMT.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades cautiously near Monday’s low at around 97.30 at the press time. The USD Index fell sharply on Monday after failing to extend its three-day winning streak above 97.85.
- Investors will pay close attention to Fed Powell’s speech to get cues about the pace at which the central bank will cut interest rates going forward. In the policy meeting last week, the Fed announced a 25-basis-point (bps) reduction in interest rates, the first of 2025, and signaled two more in the remainder of the year.
- The Fed started the monetary-easing campaign amid a slowing United States (US) job market. On Monday, a slew of Federal Open Market Committee (FOMC) members stated that the rate cut was precautionary to support weakening labor demand. However, FOMC members warned that the central bank needs to remain cautious on further monetary policy expansions as inflation remains well above the 2% target.
- On the contrary, Fed Governor Stephen Miran stated that interest rates should be reduced further by roughly two percentage points to offset risks to employment. ”Fed policy is very restrictive and poses risk to Fed’s employment mandate and I believe appropriate Fed funds rate is in mid-2% area, almost 2 percentage points below current level,” Miran said.
- On the economic front, investors will focus on preliminary US S&P Global PMI data for September, which will be published at 13:45 GMT. The Composite PMI is expected to have remained steady at 54.6, suggesting that the overall business activity expanded at a consistent pace.
Technical Analysis: Pound Sterling flattens above 1.3500
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The Pound Sterling trades flat around 1.3515 against the US Dollar on Tuesday. The near-term trend of the GBP/USD pair remains bearish as it trades below the 20-day Exponential Moving Average (EMA), currently hovering around 1.3525. The Cable trades near the lower end of a Rising Channel formation around 1.3470
The 14-day Relative Strength Index (RSI) has fallen sharply below 50.00. A fresh bearish momentum would emerge if the RSI breaks below 40.00.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 will act as a key barrier.
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.
