- The British Pound is still in snooze mode on Monday.
- UK Manufacturing PMI comes in line with expectations at 52.5 in August.
- The US Dollar Index opens up steadily, with US markets closed for public holidays.
The British Pound (GBP) holds on to marginal gains during the European trading session on Monday, with US markets closed in observance of Labor Day. This means very slim volumes, even thinner than on a typical Monday. However, the UK market already had to digest the S&P Global/CIPS Purchasing Managers Index (PMI) for the manufacturing sector this morning, which fell in line as expected at 52.5.
Meanwhile, the US Dollar Index (DXY) – which gauges the value of the US Dollar against a basket of six foreign currencies – is still recovering from a chunky selloff over a week ago. Last week, though, the Greenback recovered on some strong US economic data, which might limit the initial rate cut from the US Federal Reserve (Fed) to only 25 basis points in September. With more PMI data set to come out this week and the US Jobs reports on Friday, it will all depend on this week’s data to confirm the interest rate cut size next week.
Daily digest market movers: BoE looks for later cut
- S&P Global released its Manufacturing Purchasing Managers Index (PMI) for August, coming at 52.5, the same pace as the previous month.
- US markets are closed in observance of Labor Day on Monday.
- The CME Fedwatch Tool shows a 69.0% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 31.0% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 48.9%, while there is a 42.0% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 9.1% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- Regarding the Bank of England (BoE), markets are pricing in no rate cut for the September 19 meeting, while the November 7 decision has an 87.2% near certainty of seeing the BoE cut rates by 25 basis points.
- The US 10-year benchmark rate trades at 3.90% and will not move on Monday due to the US bank holidays.
- The UK 10-year Gilt Benchmark trades at 4.06% and popped higher on Monday after closing at 4.01% on Friday.
- European equities are set to close off this Monday with some minor losses while the FTSE 100 in the UK is set to close even with a minor gain, outperforming even US futures.
GBP/USD Technical Analysis: All but quiet towards Friday
The British Pound trades phenomenally high, at levels not seen since July 2023 against the US Dollar. The recent retracement last week is more than welcome, and now traders who want to go long GBP/USD will need to identify support levels on where it makes sense to get in for a retest of at least the year-to-date high, near 1.3237, or 1.33 for a fresh high.
On the downside, the moving averages are too far for now to offer any kind of support. It is better to look at a bounce off the upper band of the trend channel that was well respected during the past six months, at around 1.3120. In case that level does not hold, 1.3044 looks to be a nice nearby platform that worked as a resistance in August. Should more downfall occur, the 55-day Simple Moving Average (SMA) at 1.2869 falls nicely in line with a pivotal level since June 2023 at 1.2849, just 20 pips away from each other as a strong support area.
GBP/USD Daily Chart
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.