- The Pound Sterling buyers were unstoppable against the US Dollar amid a Fed-BoE policy divergence.
- GBP/USD eyes more gains as top-tier US economic data are set to dominate the week ahead.
- The Pound Sterling flirts with overbought territory on the daily RSI, what’s next?
The Pound Sterling (GBP) clinched a second consecutive weekly gain against the US Dollar (USD), as the GBP/USD pair reached its highest level since March 2022, above 1.3200.
Pound Sterling stands tall as US Dollar wilted
GBP/USD witnessed another blockbuster week, devoid of high-impact economic events from the United Kingdom (UK). The underlying positive tone around the major was mainly driven by the sustained weakness in the US Dollar against its major rivals.
Traders continued to retain their bearish outlooks on the Greenback, as dovish US Federal Reserve (Fed) expectations heightened in the Jackson Hole Symposium week. USD buyers stayed on the back foot in the run-up to the Minutes of the Fed’s July meeting and Chairman Jerome Powell’s speech due later in the week.
Despite a risk-averse market environment, the US Dollar failed to find the safe-haven demand amid nervousness ahead of Powell’s appearance. The Greenback received a fresh blow following Wednesday’s release of the outright dovish Fed Minutes.
Most policymakers thought that “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting,” the Minutes said. Further, the Minutes read that other policymakers would have even been willing to reduce borrowing costs in the July meeting itself.
The Nonfarm Payrolls Benchmark Revision further cemented a Fed rate cut for September. The US Labor Department said that the NFP for the period from April 2023 to March 2024 was lowered by 818,000. The revision represented a total downward change of about 0.5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}.
Weak US S&P Global preliminary Manufacturing Purchasing Managers’ Index (PMI) and Jobless Claims data on Thursday bolstered bets for a dovish policy pivot as early as September.
Markets priced in a 27{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} probability of 50 basis points (bps) cut at the Fed’s September 17-18 meeting and a 73{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} chance of a 25 bps reduction, according to the CME Group’s FedWatch Tool.
With traders moving away from their US Dollar longs, GBP/USD hit a fresh 13-month high of 1.3130, also helped by strong UK S&P Global preliminary business PMIs. UK Manufacturing PMI improved from 52.1 in July to 52.5 in August. Markets had expected a 52.1 print. Meanwhile, the preliminary UK Services Business Activity Index rose to 53.3 in August, compared to July’s 52.5 and the estimated 52.8 figure.
The Fed-BoE monetary policy divergence remained in play and acted as a tailwind for the Pound Sterling, as the US Dollar stood on thin ice, awaiting Powell’s words.
Powell noted that the time has come for the monetary policy to adjust and said that they do not welcome a further cooling in labor market conditions. “We will do everything we can to support a strong labor market as we make further progress toward price stability,” he added. The USD came under renewed selling pressure with the immediate reaction, allowing GBP/USD to climb above 1.3200 for the first time since March 2022.
Week ahead: US growth and inflation data on tap
Following the volatility in the Jackson Hole Symposium week, Pound Sterling traders catch their breath amid a holiday-shortened week.
The UK markets closed on Monday in observance of the Summer Bank Holiday. Later that day, the US economic calendar will feature the Durable Good Orders but the data is unlikely to have a significant impact on the value of the US Dollar and the GBP/USD pair.
The main highlight of the week is expected to be the second estimate of the US Gross Domestic Product (GDP) report and the core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure.
In the first half of the week, the UK CBI Realized Sales and the US Conference Board Consumer Confidence data will offer some trading incentives.
Sentiment around the central banks’ policy expectations, speeches from Fed officials and the Middle East geopolitical risks will continue to drive the GBP/USD price action.
GBP/USD: Technical Outlook
The GBP/USD recovery from five-week lows of 1.2665 gathered strength in the past week, as buyers stormed through the previous year-to-date (YTD) high at 1.3045 to reach a 29-month-high above 1.3200.
In doing so, Pound Sterling went further beyond all the key daily Simple Moving Averages (SMA). The 14-day Relative Strength Index (RSI) entered the overbought territory, currently near 75.
With overbought conditions, Pound Sterling traders could see a brief correction, with every pullback likely to be bought into so long as the leading indicator holds above the 50 level.
GBP/USD could meet interim resistance at 1.3250 before buyers aim for the 1.3300 round level.
In case of a corrective downside, the previous YTD high at 1.3045 will be the initial contention point, below which the 1.3000 key level will be tested.
If the selling momentum intensifies, the 1.2900 level will be threatened, followed by the confluence zone around 1.2850. At that level, the 50-day SMA and the 21-day SMA hang around.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} target, the Fed will raise rates, which helps the USD value. When inflation falls below 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
