- The British Pound extends its upward movement as market expectations lean towards the Bank of England (BoE) maintaining higher interest rates for an extended period compared to the Federal Reserve (Fed).
- In the UK, inflation remains resilient, especially within the services sector, primarily attributed to robust wage growth.
- Investors are anticipating fresh signals on the interest rate outlook as they await testimony from Fed Chair Powell.
During Monday’s European session, the Pound Sterling (GBP) holds onto its gains, trading around 1.2670, as investors factor in the likelihood that the Bank of England (BoE) will not lower interest rates in the near future. With the United Kingdom (UK) boasting the highest inflation rate among the Group of Seven economies (G-7), BoE policymakers are compelled to maintain interest rates in the restrictive territory for an extended period.
The persistence of solid wage growth, particularly influencing inflation in the services sector, keeps the UK’s core Consumer Price Index (CPI) outlook resilient. BoE policymakers assert that the pace of growth in labor costs and service inflation remains double the rate necessary for inflation to sustainably return to the 2% target.
The anticipation of higher interest rates proves advantageous for the Pound Sterling, attracting increased foreign inflows.
This week, with a relatively light economic calendar in the UK, market sentiment is expected to play a pivotal role in guiding the GBP/USD pair. In the United States, the impact of Federal Reserve (Fed) Chair Jerome Powell’s congressional testimony and the release of Nonfarm Payrolls (NFP) data on market sentiment could provide valuable insights into when the Fed might initiate interest rate reductions.
Daily digest market movers: Pound Sterling jumps while US Dollar remains under pressure
- In Monday’s European session, the Pound Sterling maintains its upward momentum against the US Dollar, continuing the V-shaped recovery that started from 1.2600 on Friday.
- The US Dollar experiences a decline following the release of discouraging Manufacturing PMI figures for February by the United States Institute of Supply Management (ISM). The report highlights a dismal New Orders Index and indicates a rise in layoffs within the manufacturing sector, pointing towards an unfavorable economic outlook.
- The trajectory of the US Dollar this week will be influenced by Federal Reserve Chair Jerome Powell’s testimony before Congress and the release of labor market data for February. Powell is expected to offer updated insights on the outlook for interest rates.
- Simultaneously, there is a positive shift in the economic outlook for the United Kingdom, as indicated by the upbeat Manufacturing PMI reported by S&P Global/CIPS for February. Registering at 47.5, the highest since April 2023, the Manufacturing PMI surpassed both expectations and the previous reading of 47.1. Nonetheless, it’s noteworthy that the index has consistently stayed below the 50.0 threshold for the past 19 months, signaling a sustained contraction.
- In the Manufacturing PMI report, S&P Global highlighted the substantial impact on new orders, both domestically and internationally, attributing it to client destocking, diminished market confidence, and financial pressures. The report issued a cautionary note, indicating that factory owners encountered formidable challenges in February, primarily due to supply chain disruptions stemming from the Red Sea crisis. These disruptions led to delays in the delivery of raw materials, consequently causing an increase in input prices.
- Looking ahead, the direction of the Pound Sterling will primarily hinge on market sentiments regarding the potential timing of rate cuts by the Bank of England. Investors anticipate a reduction in the BoE’s key interest rate starting in August. Nevertheless, policymakers at the Bank of England might persist in favoring the retention of interest rates at 5.25% until they are assured that inflation is on track to reach the targeted rate of 2%.
Technical Analysis: Pound Sterling advances toward 1.2700
The Pound Sterling continues its upward momentum, reaching 1.2670 following a robust rebound from the support level at 1.2600. The currency is approaching the descending trendline of the Descending Triangle pattern observed on the daily timeframe, originating from the high on December 28 at 1.2827. The pattern also features a horizontal support line, established from the low on December 13, approximately at 1.2500.
The Descending Triangle pattern reflects a sense of uncertainty among market participants, leaning slightly towards a downward inclination, as evidenced by lower highs and consistent lows.
Within this context, the 14-period Relative Strength Index (RSI) remains confined within the 40.00-60.00 range, indicating a significant contraction in volatility.
