- Pound Sterling vs. US dollar falls more than 100 pips on “Super Thursday”.
- BoE Governor Bailey suggests inflation may show sharp decline in April data, UK growth figures paint a more upbeat picture.
- The US dollar strengthens on safe havens after PacWest sees large deposit outflows, renewing banking jitters.
Pound Sterling (GBP) continued to fall against the US dollar (USD) on Friday, following weakness triggered by the Bank of England (BoE) monetary policy meeting the previous day. GBP/USD is now trading below 1.2500 after being pushed lower following the release of the Michigan Consumer Confidence Index, which showed a drop to 57.7 from 63, and Michigan 5-year inflation expectations, which rose to 3.2% from earlier 3.0%.
Technically, GBP/USD is showing short-term bearish signs, but overall remains in a long-term uptrend, favoring longs over shorts.
Movements in the GBP/USD market
- Sterling gained ground on Friday following the release of UK GDP data which was feared to show the UK slipping into recession.
- However, quarterly GDP came in at a positive 0.1%, which is in line with estimates. GDP rose by 0.2% year-on-year, which is also in line with forecasts. However, the month-on-month figure showed a below-expected fall of -0.3%, when growth of 0.1% was expected.
- On Thursday, a combination of dovish comments at the BoE meeting and renewed fears of a banking crisis, supporting safe-haven flows to the US dollar, sent GBP/USD sharply lower on Thursday.
- GBP/USD initially fell after the BoE announced its 7:2 decision (the same ratio as last session) to raise interest rates by 0.25%, taking Bank Rate to 4.50%.
- The pair continued lower after BoE chairman Andrew Bailey said: “The committee had good reason to believe that headline inflation will fall significantly from April.”
- Although sterling recovered later as Bailey highlighted spillovers and how “risks to inflation remain skewed to the upside as spillovers persist”.
- GBP/USD resumed its sell-off after the US dollar strengthened on safe-haven demand after struggling US lender PacWest released a package of securities, renewing fears of a US banking crisis. The filing revealed that the bank’s deposits fell nearly 10%, leading to a 20% selloff in the bank’s stock.
- Headline inflation in the UK is at 10.1%, more than double the 4.9% in the US. However, US and UK core inflation are more similar, with the US at 6.2% versus the UK’s 5.5%. However, it does suggest that the UK will need to continue raising rates after the Federal Reserve (Fed) pauses. This should benefit GBP versus USD as global investors favor currencies with higher interest rates to park their money.
- The CME Group FedWatch Tool shows a 90% chance that the Fed will not raise interest rates further.
- In addition, the Fed removed language from its latest statement that further tightening of monetary policy would be appropriate if conditions warranted. The BoE, on the other hand, stuck to similar wording in its statement.
- The US dollar is threatened by the risk of a default on the US debt ceiling. US Treasury Secretary Janet Yellen warned on Thursday that a US failure to raise the debt ceiling would cause “economic and financial disaster”. Most analysts believe this would be negative for the USD.
- The main release for the US dollar on Friday is the Michigan Consumer Confidence Index, which is forecast to fall to 63.0 in May, according to a preliminary reading.
GBP/USD Technical Analysis: Shooting Star Reversal Confirmed
GBP/USD is trading below 1.2500 and is showing signs of extending lower, but this does not change the generally bullish long-term picture. The uptrend remains intact as long as the May lows of 1.2435 hold, thus still favoring GBP longs over shorts for now.
A Japanese shooting star formed in the market on Wednesday candlestick a reversal pattern on GBP/USD, indicating the possibility of a short-term bearish reversal. The pattern received confirmation after Thursday’s bearish close. More downside is expected in the near term, likely to support at the base of the rising channel/wedge located around 1.2475.
The Relative Strength Index (RSI) is falling sharply after showing a slight bearish divergence between the price at the May highs and the RSI. This is indicative of underlying weakness and further suggests a shorter-term downside.
As the overall trend is bullish, the GBP/USD exchange rate is likely to recover and continue to strengthen. The May 2022 highs at 1.2665 provide the first level of resistance, but once broken open the way to the 100-week simple moving average (SMA) at 1.2713 and finally the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1 ,2758. All provide potential upside targets for the pair. Each level will have to be decisively broken through to open the door to the next. Likewise, a decisive break of the 1.2435 lows will be necessary for the bullish trend to reverse.
Decisive breakouts are characterized by long daily candles that break the relevant resistance levels and close near their highs or lows of the day (depending on whether the breakout is bullish or bearish). Alternatively, three consecutive candles that break the level can also be decisive. Such badges confirm that the breakout is not a “false breakout” or a bull/bear trap.
Frequently asked questions about the pound sterling
What is a 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 foreign exchange (FX) unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, as of 2022. data.
Its key trading pairs are GBP/USD aka ‘Cable’ which represent 11% of FX, 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).
What impact do Bank of England decisions have on the pound sterling?
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary objective of “price stability” – a stable rate of inflation around 2%. Its primary tool to achieve this goal is the adjustment of interest rates.
When inflation is too high, the BoE will try to keep it in check by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for the GBP as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation drops too low, it is a sign of slowing economic growth. In this scenario, the BoE will consider cutting interest rates to make credit cheaper so businesses borrow more to invest in growth-creating projects.
How does economic data affect the value of the pound?
The data released assesses the health of the economy and can affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMI and employment can influence the direction of the GBP.
A strong economy is good for Sterling. Not only will this attract more foreign investment, but it may encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, if the economic data is weak, the pound sterling is likely to fall.
How does the balance of trade affect the pound?
Another important data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns on exports and what it spends on imports for a given period.
If a country produces a highly sought-after export, its currency will benefit purely from the extraordinary demand created by foreign buyers looking to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa a negative balance.