Pound Sterling trades sideways above 1.2700 ahead of eventful week

The Pound Sterling trades sideways as investors await UK inflation and the BoE decision for fresh guidance.
The BoE is expected to maintain interest rates unchanged as UK inflation is far from the 2% target.
The Fed’s dot plot will guide the next move in the US Dollar.

The Pound Sterling (GBP) struggles for a decisive move in Monday’s late London session. Investors stay on the sidelines ahead of the interest rate decisions by the Federal Reserve (Fed) and the Bank of England (BoE), which will be announced on Wednesday and Thursday, respectively.

Investors see the BoE leaving interest rates unchanged at 5.25% as inflation is much higher than the desired rate of 2%. Market participants will keenly focus on the guidance for interest rates, namely clues about how long the BoE will keep interest rates high.

Currently, markets expec the BoE to begin reducing interest rates in its August policy meeting. However, policymakers have said that rate cuts would be appropriate only if they are convinced that inflation will sustainably rise to the 2% target. 

The BoE needs to make a balancing act between high inflation and uncertainty over economic growth. The UK economy was in a technical recession in the second half of 2023, reporting contraction in the last two quarters. The nation grew by 0.2% in January but this is insufficient to confirm that the economy has returned to growth in the first quarter as a whole.

Daily digest market movers: Pound Sterling consolidates, following US Dollar’s footprints

The Pound Sterling trades in a narrow range of around 1.2730 and remains feeble as investors shift focus to the monetary policy decisions by the Federal Reserve and the Bank of England. The Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50%. Investors will keenly focus on the dot plot, which indicates policymakers’ expectations for interest rates over time. 
Fed policymakers projected three rate cuts this year in December’s dot plot. The Fed could revise these projections as consumer and producer inflation has been stubborn in the first two months. If the Fed projects fewer rate cuts, the appeal for the US dollar would strengthen. The US Dollar Index (DXY) has started the week on a flat note, trading lackluster around 103.45.
On the other side of the Atlantic, the BoE is also expected to hold interest rates unchanged at 5.25% for the fifth straight time. The victory over inflation in the United Kingdom is far from over, as wage growth momentum is significantly higher than what is required to bring inflation down to the 2% target. Out of the nine policy committee members, MPC member Swati Dhingra is expected to support a rate-cut decision.    
Before the BoE decision, the Pound Sterling will dance to the tunes of the Consumer Price Index (CPI) data for February, which will be published on Wednesday. The annual core CPI, which strips off volatile food and energy prices, is forecasted to have decelerated to 4.6% from 5.1% in January. The monthly headline CPI is expected to have grown by 0.7% after declining by 0.6% in January. 
Soft inflation data could deepen expectations that the BoE will cut rates in the August policy meeting, while hot figures will likely dampen these expectations.

Technical Analysis: Pound Sterling trades close to 20-EMA at 1.2730

The Pound Sterling trades back and forth around 1.2730. The GBP/USD pair corrected to the 20-day Exponential Moving Average (EMA) near 1.2730 as the divergence with spot prices widened. The asset may find support near the breakout region of the Descending Triangle, which is around 1.2700. On the upside, a seven-month high at around 1.2900 will be a major barricade for the Pound Sterling bulls.

The 14-period Relative Strength Index (RSI) returns to the 40.00-60.00 range, indicating a sharp volatility contraction.

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.

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