The Pound Sterling (GBP), the United Kingdom’s official currency, has fallen to a two-week low against the US Dollar (USD). On Friday during the European trading session, it was trading near the 1.3400 level. After many traders were caught flat footed in early September, traders are recalibrating their assumptions around the Federal Reserve’s monetary policy. This move follows news of upbeat preliminary S&P Global Purchasing Managers’ Index (PMI) data for August. With the GBP now navigating a period of extreme market turbulence, discussions have sparked over where the GBP may be headed in the short term.
Going all the way back to 886 AD, the Pound Sterling is considered the oldest currency in the world. The currency plays a crucial role in the global economy, accounting for 12% of all foreign exchange (FX) transactions, which averages around $630 billion daily based on 2022 data. Comprising one-half of the so-called ‘Cable’ cross—GBP/USD—this major currency trading pair is one of the true cornerstones of the global currency market. It has an equally amazing share of 11% of foreign exchange!
Current Market Conditions
As of Friday, the British Pound has maintained general strength against its major counterparts in the wake of a string of optimistic economic data. The GBP/USD pair recently fell under the 20-day Exponential Moving Average (EMA) at roughly 1.3450. This change has raised awareness and alarm for its short-term trajectory. Analysts say this change could bring the opposite effect, prompting more speculation and uncertainty over the currency’s future performance.
Even though it’s been a strong day, traders are still waiting for the other shoe to drop with the threat of bearish continuation looming. Another important level of support can be found at the 11 August low of 1.3400. On the upside, the July 1 high close at 1.3790 serves as a key layer of resistance. The 14-day Relative Strength Index (RSI) has dipped below 40.00. If it can’t reclaim and hold this level, we might be in for more bearish action to come.
“With another inflation and payrolls print still due before the September meeting, Powell has every reason to stay patient and keep optionality open.” – Analysts at Saxo
Bank of England’s Recent Decisions
A rather remarkable recent move by the Bank of England (BoE) represents a strict monetary policy turnaround. They cut the base interest rates by 25 basis points, to 4%. They arrived at this conclusion with a very slim margin at their most recent FOMC policy meeting. At the same time, they pledged to a “prudent and gradual” monetary easing path.
The ramifications of these controversial decisions are front and center as market participants continue to respond. Many analysts have indicated that the BoE’s more cautious approach is a signal of continuing UK inflation and growth worries. Jeffrey Schmid noted that the central bank is “not in a hurry to cut interest [rates] as inflation numbers are likely closer to 3 than 2, and there is work to do.” This feeling helps to portray that even though the BoE is approaching easing, it is still cautious about the general economic signals.
Impacts on Trading Pairs
The Pound Sterling’s recent volatility affects several key trading pairs, including GBP/JPY (known as the ‘Dragon’) and EUR/GBP. The GBP/JPY pair now makes up just under 3% of FX trades, with EUR/GBP at about 2%. These movements in GBP/USD create a ripple effect across these pairs as the market pivots over time through traders moving to the increasingly favorable pair.
As traders continue to grapple with these uncertainties, they are laser focused on any upcoming economic data releases. The outcomes of these reports will be critical in shaping expectations for both the BoE and Federal Reserve’s future policies. Moreover, ongoing geopolitical events could further shift trading dynamics over the next few weeks.