• Mon. May 20th, 2024

Pound Sterling retreats as hopes of rate cuts from BoE escalate

EMBARGOED TO 0001 THURSDAY MARCH 30 File photo dated 26/01/18 of pound coins and English bank notes, as around £21 billion has been lost by the Government due to fraud since the start of the pandemic, according to the National Audit Office.

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  • Pound Sterling fails to hold gains inspired by upbeat S&P Global Services PMI data.
  • The UK economy is on the brink of a technical recession.
  • BoE’s Pill signals that policymakers are discussing when the central bank could start reducing interest rates.

The Pound Sterling (GBP) struggles to hold the recovery move in the European session on Tuesday as the near-term outlook for risk-sensitive assets is bearish. The appeal of safe-haven assets is broadly upbeat as investors see the Federal Reserve (Fed) not rushing to cut interest rates. Receding risks of a recession in the United States due to strong labor and retail demand are allowing plenty of time for Fed policymakers to decide on rate cuts.

The GBP/USD fails to accelerate gains even though the UK’s S&P Global/CIPS Services PMI has improved in January. The economic data rose to 54.3, better than expectations of 53.8 and the former reading of 53.4. The agency reported that a robust inflow of fresh orders, strong hiring in the last six months, and deepening prospects of rate cuts by the Bank of England (BoE) led to a strong uptick in the Services PMI.

Daily Digest Market Movers: Pound Sterling falls back as US Dollar rebounds

  • Pound Sterling struggles to grip the 1.2500 tentative support discovered in the late Asian session on Tuesday as the broader appeal is still downbeat amid a cautious market mood.
  • The outlook for risk-perceived assets is bearish as hopes of aggressive rate cuts by the Federal Reserve have waned due to resilient United States economic growth.
  • As per the CME Fedwatch tool, investors see a rate cut of 25 basis points (bps) in May from earlier expectations of March.
  • The US economy is performing well amid improving order books for the factory and IT sector, upbeat labor market conditions, and robust consumer spending.
  • Minneapolis Federal Reserve Bank President Neel Kashkari said on Monday that lower risks to economic growth are allowing more time for the central bank to decide on rate cuts.
  • The Pound Sterling is also facing risks of a technical recession that could force Bank of England policymakers to lean towards a dovish interest rate stance.
  • It is worth mentioning that an economy is considered to be in a technical recession if it contracts for two straight quarters.
  • The United Kingdom’s economy contracted by 0.1% in the third quarter of 2023, and the likelihood of a technical recession is high as it is expected to underperform again.
  • A slight dovish guidance on interest rates from BoE Chief Economist Huw Pill has also dampened the appeal for the Pound Sterling.
  • BoE Pill said on Monday that the stance of “if” it is appropriate to cut interest rates has changed to “when.”
  • In the latest monetary policy statement, BoE Governor Andrew Bailey said inflation is moving in the right direction and kept borrowing costs “under review”.
  • Due to a light economic calendar, market participants will focus on the speech from BoE Catherine Mann, which is scheduled for Thursday.  Mann was one of two of nine Monetary Policy Committee (MPC) members who voted for a rate hike of 25 bps.

Technical Analysis: Pound Sterling falls after a less-confidence pullback move to near 1.2560

Pound Sterling falls back to near seven-week low of 1.2520. Earlier, the GBP/USD pair advanced to test the breakdown of the Descending Triangle chart pattern formed on the daily time frame. The Cable is expected face an intense sell-off after a soft test of the breakdown region near 1.2600.

The 14-period Relative Strength Index (RSI) has slipped below 40.00 for the first time in three months. More downside is possible amid an absence of divergence and oversold signals.

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