Pound Sterling finds support, though risk-off mood keeps downside bias intact
- The Pound Sterling finds cushion near 1.2400 after mixed UK Retail Sales data for March.
- Geopolitical fears and a strong outlook for the US Dollar support the downside in the GBP/USD pair.
- Fed's Bostic said he is comfortable with interest rates remaining high.
The Pound Sterling (GBP) finds a temporary support near almost five-month low around 1.2400 in Friday’s London session. The GBP/USD pair remains on the backfoot due to deepening geopolitical tensions after Israel reportedly launched an attack against Iran, which improved the appeal for the safe-haven US Dollar. Moreover, continued hawkish guidance on interest rates from Federal Reserve (Fed) policymakers kept the US Dollar Index (DXY) above the crucial support of 106.00.
On Thursday, Atlanta Fed President Raphael Bostic said progress in inflation towards the 2% target will be slower than expected. Bostic also said he is comfortable with interest rates remaining high as labor demand is robust and wage growth remains resilient.
On the economic calendar front, the United Kingdom Retail Sales report for March has highlighted the consequences of higher interest rates. UK Retail Sales remained stagnant month-on-month as a decline in food and non-store retailing was offset by spending on fuel and non-food items.
Daily digest market movers: Pound Sterling finds support after mixed UK Retail Sales data
- The Pound Sterling finds interim support near 1.2400. The near-term outlook remains weak as the market mood turns risk-off due to fears of further escalation in Middle East tensions. Israel retaliated to Iran’s attack with drones in Friday’s early Asian session, Reuters reported citing several US officials. Iranian state media said that the air defense system brought down three drones over the central city of Isfahan.
- UK Retail Sales were unchanged in March compared with the previous month, according to data from the country's Office for National Statistics, less than the 0.3% increase forecasted by economists. In February, Retail Sales grew by a meagre 0.1%. On an annual basis, Retail Sales grew sharply by 0.8% after contracting by 0.3% in February.
- Retail Sales data indicate the current status of consumer spending, which accounts for a major part of economic growth. A stagnant performance on a month-on-month basis indicates that the BoE's high interest rates have significantly impacted consumer spending.
- Going forward, headlines surrounding the Middle East conflict and speculation about BoE rate cuts will guide the next move in the Pound Sterling. On the latter, markets currently anticipate the BoE starting to lower rates in November as March inflation data declined at a slower pace than estimated.
- On Thursday, BoE policymaker Megan Greene said in the Atlantic Council think tank in Washington: "The numbers that we're seeing in terms of wage growth and services inflation just aren't consistent with a sustainable 2% (consumer price) inflation target." When asked about a potential time frame for rate cuts, Greene said: "I don't think it's imminent."
Technical Analysis: Pound Sterling attempts to sustain above 1.2400
The Pound Sterling refreshes an almost five-month low near 1.2400 against the US Dollar. The GBP/USD pair is expected to see more downside as the longer-term outlook is bearish. The asset remains below the 200-day Exponential Moving Average (EMA), which trades around 1.2560. The Cable experienced a sharp downside after a breakdown of the Head and Shoulder chart pattern formed on a daily time frame.
Adding to that, 14-period Relative Strength Index (RSI) oscillates inside the bearish range of between 20.00 and 40.00, suggesting momentum leans to the downside.
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.