- The Pound Sterling is under strain as geopolitical tensions ease, boosting the attractiveness of safe-haven assets.
- Speculation regarding potential rate cuts by the Bank of England will be influenced by the upcoming employment and inflation data.
- The UK economy is poised to emerge from a technical recession.
During Monday’s London session, the Pound Sterling (GBP) exhibited a modest recovery against the US Dollar. Nevertheless, short-term demand for the GBP/USD pair remains subdued due to escalating tensions in the Middle East and speculation surrounding the Bank of England (BoE) potentially initiating interest rate cuts sooner than the Federal Reserve (Fed).
Currently, financial markets are anticipating that the BoE may commence reducing borrowing costs as early as August, while the Fed is expected to follow suit in September.
This week, the release of the United Kingdom’s employment and inflation data will provide fresh guidance for market expectations regarding the BoE’s actions, prompting speculation on when it might initiate its much-anticipated rate-cut cycle. Investors will closely scrutinize the wage growth data for the three months ending in February, which is scheduled for release on Tuesday, as it remains a significant factor influencing the UK’s persistent inflationary pressures.
Daily digest market movers: Pound Sterling remains on backfoot, focus shifts to UK Employment
- “The Pound Sterling has found temporary support after dropping to a low not seen in over four months, nearing 1.2430. Rising tensions in the Middle East and diminishing expectations of the Federal Reserve (Fed) shifting towards rate cuts in its June meeting have dampened the appeal of risk-sensitive currencies.
- The escalation of tensions in the Middle East, highlighted by hundreds of air strikes from Iran on Israel in retaliation for an attack on the Iranian embassy in Syria near Damascus, resulting in casualties including high-ranking members of the Islamic Revolutionary Guard Corps (IRGC), has heightened concerns and reduced demand for currencies perceived as risky.
- Both the escalation of geopolitical tensions and the diminished expectations of Fed rate cuts favor the US Dollar, often seen as a safe-haven asset. The US Dollar Index (DXY), which measures the value of the dollar against six major currencies, is hovering near a five-month high at 106.10.
- Investors will turn their attention to the United States’ monthly Retail Sales data for March, scheduled for release at 12:30 GMT on Monday. Forecasters anticipate a 0.3% growth, half the rate seen in February.
- Meanwhile, in the United Kingdom, improved monthly Gross Domestic Product (GDP) figures have eased concerns among Bank of England (BoE) policymakers. February’s GDP rose by 0.1%, indicating that the economy is on track to recover from the technical recession experienced in the latter half of 2023. Additionally, January’s GDP growth was revised upward from 0.2% to 0.3%.
- With the improving economic outlook, the BoE may opt to maintain a restrictive policy stance until they are confident that inflation will return to the 2% target sustainably.”
Technical Analysis: Pound Sterling struggles to recapture 1.2500
The Pound Sterling faced a significant sell-off following a breach of the crucial psychological level at 1.2500. The GBP/USD pair’s long-term trajectory has shifted bearish as it dipped below the 200-day Exponential Moving Average (EMA), currently positioned around 1.2570.
Confirmation of a bearish reversal came with the breakdown of the Head and Shoulders chart pattern on the daily timeframe. The neckline of this pattern, drawn from the low point near 1.2500 on December 8, was breached, signaling further downside potential.
Additionally, the 14-period Relative Strength Index (RSI) plummeted below the 40.00 mark, indicating the onset of a fresh bearish momentum.
