- The pound fell as UK GDP rose at a slower-than-expected pace and factory activity contracted in November.
- Traders have raised dovish Bank of England bets on the February monetary policy meeting.
- Investors are awaiting US weekly unemployment claims data and December retail sales data on Thursday.
The British pound faces selling pressure in the European session on Thursday following the release of monthly UK GDP and factory data for November. The Office for National Statistics (ONS) reported that the economy returned to growth after contracting in October. However, the growth rate was slower than expected. The economy rose 0.1% after declining at a similar pace in October. Economists expected the economy to grow by 0.2%.
Manufacturing and industrial production data in November contracted on a monthly and yearly basis. On a monthly basis, industrial and manufacturing production contracted by 0.4% and 0.3%, respectively. The pace of decline was slower than what we saw in October. Economists expect industrial production to grow by 0.1%, while estimates indicate that industrial production will remain flat.
Signs of continued weakness in UK factory activity suggest that producers are not fully utilizing their operating capacity on the assumption that the already weak demand environment will worsen after US President-elect Donald Trump imposed hefty tariffs on imports globally once he took office. office.
However, growing expectations that the Bank of England’s monetary policy easing will be less gradual this year should provide some relief to factory owners. Traders raised cautious Bank of England bets following the release of UK CPI data for December on Wednesday, which showed signs of slowing price pressures.
Traders believe there is about an 84% chance that the Bank of England will cut interest rates by 25 basis points to 4.5% at its policy meeting in February.
Cooling price pressures provided some relief to Treasury Secretary Rachel Reeves, halting the rise in UK bond yields. UK 30-year government bond yields corrected to 5.28% from a more than 26-year high of 5.47%. The British currency has faced a significant decline in the past few trading days as British bond yields rose due to uncertainty over the economic outlook.
Daily summary of market drivers: The British pound is struggling against the US dollar
- The British pound fell to approximately 1.2200 against the US dollar (USD) in European trading hours. GBP/USD fell on weak data in the UK. However, the US dollar is consolidating, with the US Dollar Index (DXY) fluctuating around 109.00. The US Dollar Index is turning sideways as traders reevaluate their expectations on potential interest rate action by the Federal Reserve (Fed) for the full year.
- Market participants expect the Fed’s monetary policy easing path to be less gradual than previously expected. The outlook for the Federal Reserve’s policy outlook was affected after the release of US inflation data for December on Wednesday, which showed that progress in the direction of declining inflation has not yet stopped.
- According to the CME FedWatch tool, traders expect the Fed to deliver more than one rate cut this year and anticipate the first cut in June. Before the December inflation data, traders were expecting only one rate cut in September.
- For further signals on the interest rate outlook, investors will focus on US initial jobless claims data for the week ending January 10 and December retail sales data, which will be published at 13:30 GMT.
Technical Analysis: The British pound remains weak with the 20-day EMA declining lower
The British pound is trading near the key level of 1.2200 against the US dollar on Thursday. The outlook for the British pound remains weak as the vertically declining 20-day Exponential Moving Average (EMA) near 1.2394 indicates that the near-term trend is very bearish.
The 14-day Relative Strength Index (RSI) rebounded slightly after falling below 30.00 as the momentum oscillator turned into oversold territory. However, the broader scenario remains bearish until it recovers within the 20.00-40.00 range.
Looking down, the pair is expected to find support near the October 2023 low at 1.2050. On the upside, the 20-day EMA will act as major resistance.
Frequently asked questions about the pound sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most popular foreign exchange (FX) trading unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to 2022 data. Its main trading pairs are GBP/USD, also known as “cable”. , which represents 11% of foreign currencies, GBP/JPY, or “the dragon” as traders know it (3%), and EUR/GBP (2%). %). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary objective of “price stability” – a stable inflation rate of around 2%. The primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it more expensive for individuals and businesses to obtain credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to reduce the cost of credit so that companies borrow more to invest in growth-generating projects.
Data releases measure the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing PMIs, services and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the British pound is likely to fall.
Another important data release for the British Pound is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly sought-after exports, its currency will take full advantage of the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
