“Pound Sterling Treads Cautiously as Investors Await Fed and BoE Decisions”

Pound Sterling remains subdued in the Monday European session, with investors adopting a cautious stance ahead of the Bank of England (BoE) and Federal Reserve (Fed) interest rate decisions. The GBP/USD pair hovers in a tight range around 1.2700 as traders await policy announcements later this week.

Expectations are for the BoE to maintain interest rates at 5.25%, marking the fourth consecutive unchanged decision, despite UK core inflation surpassing the 2% target. The focus shifts to the central bank’s guidance on interest rates, posing a challenge for policymakers in the face of stubborn inflation and potential recession risks due to the deepening cost-of-living crisis.

The Pound Sterling struggles for direction, encapsulated within the 1.2700 range, as market attention turns to monetary policy announcements from the Fed and BoE. While BoE policymakers have refrained from discussing rate cuts, the underlying inflation in the UK surpasses that of other Group of Seven economies, providing room for a hawkish stance.

BoE discussions are expected to emphasize the maintenance of restrictive interest rates until policymakers gain confidence in achieving sustainable inflation return to the 2% target. Premature rate cuts are cautioned against, fearing a rebound in price pressures.

Simultaneously, the US Dollar Index (DXY) lacks clear direction ahead of the Fed’s monetary policy decision. Investors anticipate the Fed to maintain the status quo, with focus shifting to when the central bank plans to initiate interest rate reductions. Fed officials project a 75 basis points reduction in 2024, and the timing and execution of these expected rate cuts will be closely observed post the March monetary policy meeting.

Prior to the Fed’s decision, market participants will concentrate on the JOLTS Job Openings data for December, with expectations of 8.75 million job offerings, slightly lower than the 8.79 million recorded in November.

Technical Analysis: Pound Sterling consolidates near 1.2700


What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

Pound Sterling trades back and forth near 1.2700 ahead of the key monetary policy announcements on both sides of the Atlantic. The GBP/USD pair oscillates inside Friday’s trading range of 1.2675-1.2758, indicating a sharp contraction in volatility. On a daily timeframe, the Cable demonstrates a long inventory adjustment between retail participants and institutional investors. The 20-day Exponential Moving Average (EMA) near 1.2700 overlaps the Cable’s current trading range, adding to evidence that investors have sidelined ahead of the data-packed week.

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