The Pound Sterling Strengthens Amid BoE Policy Expectations
- Investors anticipate a slow and shallow policy-easing cycle from the BoE, boosting the Pound Sterling.
- Speeches from BoE MPC members Dhingra and Lombardelli are awaited for fresh interest rate guidance.
- The US Dollar weakens following the announcement of Scott Bessent as Treasury Secretary by Donald Trump.
In a significant turnaround, the Pound Sterling (GBP) shows resilience at the beginning of the week, outperforming other major currencies after experiencing a sharp decline last Friday. The decline was triggered by the faster-than-expected contraction in UK Retail Sales for October and the disappointing flash S&P Global/CIPS Composite Purchasing Managers’ Index (PMI) for November, falling below the 50.0 threshold for the first time since October 2023.
Reasons for Pound Sterling Recovery
The primary driver behind the Pound Sterling’s resurgence is the market’s confidence in the Bank of England (BoE) potentially adopting a more gradual approach towards policy easing compared to other Western central banks. Traders anticipate the BoE to maintain interest rates at 4.75% during the December meeting, with a projected 75 basis points cut to 4% by 2025, as reported by Reuters.
October’s Monthly Retail Sales saw a decline of 0.7%, attributed to consumer caution ahead of the government’s tax and spending budget announcement on October 30, according to the Office for National Statistics (ONS).
Despite the Composite PMI dipping below the expansion threshold of 50.0 due to a decline in manufacturing activity and stagnant service sector output, BoE Deputy Governor Clare Lombardelli cautions against overinterpreting a single data release. Lombardelli advocates for a gradual policy-easing strategy, expressing concerns over potential upward pressure on prices if wage growth normalizes at 3.5%-4% and inflation reaches around 3%.
Conversely, BoE external policy member Swati Dhingra’s commentary hints at a less gradual approach to interest rate cuts, emphasizing that the UK’s inflation does not significantly differ from other advanced economies and that current policy is hindering investment.
Daily Market Updates: Pound Sterling Gains, US Dollar Declines Post-Trump Announcement
- The Pound Sterling shows strength against the US Dollar (USD), aiming to surpass the resistance level of 1.2600. This gain coincides with a weaker US Dollar, as the US Dollar Index (DXY) trades down by 0.5% near 107.00.
- Following President-elect Donald Trump’s selection of Scott Bessent as Treasury Secretary, 10-year US Treasury yields drop to approximately 4.33%. Market reactions vary, with some analysts viewing the appointment favorably for Wall Street.
- Bessent’s plans, as shared in an interview with the Wall Street Journal (WSJ), include implementing tariffs, reducing spending, and preserving the US Dollar’s status as the world’s reserve currency.
- The US economy shows promise as the November flash S&P Global PMI data indicates improved economic conditions. The Composite PMI reaches 55.3, the highest in 31 months, driven by a rebound in the manufacturing sector and robust growth in services.
- Expectations are divided regarding the Federal Reserve’s December monetary policy meeting. The CME FedWatch tool suggests a 56% probability of a 25 bps interest rate cut to 4.25%-4.50%, while 44% anticipate rates to remain unchanged.
Technical Analysis: Pound Sterling Faces Resistance at 1.2600
After slipping below the psychological support level of 1.2500 against the US Dollar, the Pound Sterling rebounds. Despite this recovery, market sentiment remains bearish, with the GBP/USD pair struggling to surpass the 200-day Exponential Moving Average (EMA) near 1.2800.
The 14-day Relative Strength Index (RSI) displays a rebound from oversold levels but remains within a range of 20.00-40.00, indicating continued downside momentum.
Support is anticipated near the May low of 1.2446, while resistance lies at the November 20 high around 1.2715.
Analysis:
The Pound Sterling’s resurgence against the backdrop of BoE policy expectations and the US Dollar’s decline post-Trump’s nomination reflects the intricate dynamics of global markets. Traders are closely monitoring central bank policies, economic indicators, and political developments to navigate currency fluctuations and investment opportunities.
For individuals, understanding these market movements can impact personal finances, savings, and investments. A stronger Pound Sterling may influence travel expenses, international purchases, and foreign investments. Conversely, a weaker US Dollar can affect import prices, inflation, and interest rates, potentially altering consumer spending habits and investment decisions.
By staying informed about these economic shifts and their implications, individuals can make informed financial choices and adapt to the ever-changing global financial landscape.