Pound Sterling's Rise Amid Fed Rate Cut Speculation
The Pound Sterling (GBP) is experiencing a surge, trading 0.1% higher at 1.3360 against the US Dollar (USD) during the European trading session on Friday. This upward trend is attributed to market confidence in the Federal Reserve's (Fed) impending interest rate cut, which is expected to occur during its monetary policy meeting next week. The USD/GBP pair is witnessing a decline as the US Dollar retreats to its five-week low, with traders anticipating the Fed's decision.
The US Dollar Index (DXY), tracking the Greenback's value against six major currencies, is trading cautiously near its five-week low of 98.75. According to the CME FedWatch tool, there's an 87% probability of the Fed cutting interest rates by 25 basis points to 3.50%-3.75% in the December policy meeting.
The weakening US job market conditions further support the Fed's dovish expectations. The US ADP reported a loss of 32K jobs in November, contrary to the expected addition of 5K workers. The Federal Open Market Committee (FOMC) meeting minutes from October revealed policymakers' acknowledgment of labor market risks and the need for further monetary loosening. However, some members opposed December interest rate reductions.
Investors will focus on the US Personal Consumption Expenditure Price Index (PCE) data for September, released later in the day, but its impact on Fed expectations might be limited due to delayed data.
US Dollar Performance This Week
The table below showcases the percentage change of the US Dollar (USD) against major currencies this week. The Australian Dollar saw the strongest performance against the USD.
USD -0.42% -0.72% -0.62% -0.22% -1.19% -0.64% -0.02%
EUR 0.42% -0.30% -0.18% 0.23% -0.77% -0.22% 0.40%
GBP 0.72% 0.30% 0.35% 0.50% -0.48% 0.08% 0.70%
JPY 0.62% 0.18% -0.35% 0.40% -0.59% -0.03% 0.59%
CAD 0.22% -0.23% -0.50% -0.40% -1.02% -0.42% 0.19%
AUD 1.19% 0.77% 0.48% 0.59% 1.02% 0.56% 1.18%
NZD 0.64% 0.22% -0.08% 0.03% 0.42% -0.56% 0.62%
CHF 0.02% -0.40% -0.70% -0.59% -0.19% -1.18% -0.62%
The heat map illustrates percentage changes in major currencies against each other, with the base currency on the left and the quote currency on top.
Pound Sterling's Strength Boosted by UK Budget and PMI
The Pound Sterling's recent rally against major currencies is fueled by the United Kingdom (UK) budget announced on November 26 and an upward revision in the S&P Global Purchasing Managers' Index (PMI) data for November.
Chancellor of the Exchequer Rachel Reeves' budget outlined the Labour Party's plan to raise 26 billion pounds in taxes without burdening households. Initially, financial market participants feared the government might breach its fiscal rules to address welfare spending, potentially increasing UK gilt yields. However, the government successfully navigated the bond market test and presented large-scale investment plans.
S&P Global's Composite PMI rose to 51.2 from 50.5, easing concerns about business activity. The Bank of England (BoE) is expected to cut interest rates on December 18 to support the weakening job market, making the Pound Sterling's outlook favorable.
Technical Analysis: GBP/USD's Bullish Outlook
The Pound Sterling is trading near its monthly high of 1.3385 against the US Dollar, posted on Thursday. The pair is above a rising 20-day Exponential Moving Average (EMA) at 1.3227, indicating a positive near-term bias. The 20-day EMA has been sloping higher, with shallow dips.
The 14-day Relative Strength Index (RSI) at 62.77 suggests bullish momentum. As long as the price remains above the rising 20-day EMA, the momentum is supportive. A daily close above the 50% Fibonacci retracement at 1.3402 would reinforce the bullish tone, opening the way for further gains towards the October 17 high of 1.3471. Conversely, a failure to breach this barrier could lead to consolidation, with pullbacks leaning towards the 38.2% Fibonacci area and trend support.
Fed FAQs
The Federal Reserve (Fed) shapes US monetary policy, aiming for price stability and full employment. Its primary tool is adjusting interest rates. When inflation exceeds the 2% target, the Fed raises rates, increasing borrowing costs and strengthening the US Dollar. Conversely, when inflation falls below 2% or the Unemployment Rate is high, the Fed may lower rates to encourage borrowing, impacting the Greenback.
The Federal Open Market Committee (FOMC) meets eight times annually to assess economic conditions and make policy decisions. It comprises twelve Fed officials, including seven Board of Governors members, the New York Fed president, and four regional Reserve Bank presidents serving one-year terms.
In extreme situations, the Fed may employ Quantitative Easing (QE), a non-standard policy during crises or low inflation. QE involves printing more Dollars to buy bonds, typically weakening the US Dollar. Conversely, Quantitative Tightening (QT) strengthens the Dollar by stopping bond purchases and reinvesting principal.
