- Pound Sterling vs US Dollar declines after US bank rescue means Fed will almost certainly hike interest rates on Wednesday.
- Bearish two-bar reversal pattern suggests short-term downside pressure for GBP/USD.
- JOLTS Job Openings the main data release ahead of May’s FOMC meeting.
The Pound Sterling (GBP) bleeds into the 1.24s against the US Dollar (USD) during the European session on Tuesday, as USD gains support from the news of the emergency rescue of First Republic Bank over the weekend. This calms markets and suggests the Federal Reserve is much more likely to hike rates at its meeting concluding Wednesday.
From a technical perspective, the GBP/USD pair continues to pull back from new year-to-date highs in the 1.2580s formed on April 28, and forms a two-bar reversal pattern that bodes follow-through lower in the very short-term, though the overarching trend remains bullish.
GBP/USD market movers
- The US Dollar gains support from the news that JP Morgan has come to the rescue of troubled US regional lender, First Republic Bank (FRB), as it will buy up FRB after fears it would be taken over by the Federal Deposit Insurance Corporation (FDIC) over the weekend.
- The US Dollar is still supported by high-than-expected PCE inflation data – the Federal Reserve’s preferred inflation gauge – after last week’s data showed prices remain sticky in the United States.
- Expectations have crystallized for a 25 bps rate hike by the Federal Reserve (Fed) at the upcoming FOMC meeting on Wednesday May 3 – according to Feds Funds Futures data, probabilities for a quarter percent hike have risen from the 85% last week to 97% at the time of writing.
- That said, data for March continued to show UK inflation above 10% for the seventh consecutive month suggesting the Bank of England (BoE) is far from done with putting up interest rates.
- This contrasts with the US Federal Reserve (fed) which is seen nearing the end of its rate-hiking cycle. The prospect of comparatively higher UK interest rates, therefore, favors the Pound Sterling over the Greenback, since it will attract more capital inflows.
- GBP gains underpinning support from an unexpected MoM rise in UK house prices by 0.5% in April versus the negative figure expected, according to data from the UK’s biggest mortgage lender, Nationwide.
- Data from the Commodity Futures Trading Commision (CFTC) shows speculative investor flows have become increasingly supportive of the Pound over recent weeks, with non-commercial traders increasing their long bets above those of commercial traders who have been increasing short bets.
- JOLTS jobs reports data for March, scheduled for release at 14:00 GMT, could impact on the pair. After the release of last month’s JOLTS, for example, the US Dollar declined in as job openings fell from 10.4M to 9.9M.
GBP/USD technical analysis: Correcting within an uptrend
GBP/USD has been a broad sideways trend since the beginning of the year within a longer-term uptrend that began at the September 2022 lows. Despite the volatile ups and downs of recent months, the pair did manage to make new higher highs in the upper 1.25s in late April and the overall trend remains marginally bullish. Thus, Pound Sterling longs are marginally favored over shorts.
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GBP/USD: Daily Chart
That said, a pullback may be unfolding at the moment after a two-bar bearish reversal pattern formed at the recent highs. Two-bar reversals are fairly reliable patterns which occur when a long green full-bodied candle that makes new highs as formed on April 28 is immediately reversed the following day by a long red-down candle of a similar length. They are bearish short-term signals.
It is possible the two-bar pattern will now be followed by a leg lower which could see GBP/USD retest the 1.2350 April-range lows.
Given the dominant trend remains bullish-to-sideways, however, pressure to the upside is likely to re-emerge, and could see the price recover and rally, before breaking to fresh highs.
A decisive break above the year-to-date 1.2583 highs of April 28, would probably lead to a continuation higher to the next key resistance level at circa 1.2680.
Decisive breaks are usually characterized by moves that begin with a strong green daily bar that breaks above the ceiling or resistance level, with price closing near the highs, or, alternatively by three green consecutive bars forming that break above the ceiling or resistance level. These provide added confirmation that the break is not a ‘false break’ or bull trap.
Pound Sterling FAQs
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 < href=”https://fxssi.com/the-most-traded-currency-pairs”>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.
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