On Friday, during European trading, the British pound (GBP) edged up by 0.1% against the US dollar (USD), hovering around 1.3360. There’s a notable sense of optimism among traders that the Federal Reserve will implement interest rate cuts at its upcoming monetary policy meeting, which has helped push GBP/USD higher as the dollar drifts down to a near five-week low.
As of this moment, the US Dollar Index (DXY), which measures the dollar’s performance against six major currencies, is being traded cautiously near a five-week low of 98.75.
Using CME’s FedWatch tool, there’s a significant 87% likelihood that the Fed will decrease interest rates by 25 basis points (bp) to a range of 3.50-3.75% during its December meeting.
The Fed’s dovish outlook coincides with troubling developments in the U.S. job market. According to a report from ADP, the private sector is projected to lose 32,000 jobs in November, while only gaining about 5,000 jobs.
Minutes from the October Federal Open Market Committee (FOMC) meeting revealed that policymakers acknowledged the risks surrounding the labor market and the necessity for easing financial conditions further. Yet, some members expressed hesitance about cutting rates in December.
Later today, traders will be keeping an eye on the Personal Consumption Expenditure Price Index (PCE) data for September, which is set to be released. It’s worth noting, though, that since the information is somewhat delayed, it might only have a minor impact on expectations regarding the Fed’s actions.
Pound Sterling utilizes UK budget, PMI revised upwards
- The pound aims to build on its recent strength against major currencies as of Friday. Over the past week, it has shown resilient performance following the announcement of the UK Budget on November 26 and an upward revision of the S&P Global Purchasing Managers’ Index (PMI) data for November.
- In the previous week’s Budget, Chancellor of the Exchequer Rachel Reeves unveiled plans for the Labour Party to raise taxes by £26 billion to address public financing gaps without significantly burdening households.
- Before the Budget came out, there was some trepidation in financial markets that the government might infringe self-financing rules to manage welfare spending, a situation that could potentially elevate UK gold yields. However, the government successfully navigated the bond market test and announced significant investment initiatives.
- On Wednesday, S&P Global indicated that the composite PMI improved to 51.2 from an initial estimate of 50.5, which eased worries about sluggish business activity.
- Looking ahead, the key drivers for the pound will be market expectations about the upcoming Bank of England’s (BoE) monetary policy decisions. It is anticipated the BoE will lower interest rates at its next meeting on December 18 to address the declining employment situation.
Technical analysis: GBP/USD has further upside potential above 1.3400
The British pound is holding steady near its monthly high of 1.3385 against the US dollar, which was set on Thursday. The pair remains above the upward trending 20-day exponential moving average (EMA) of 1.3227, keeping a positive outlook in the short term. The EMA has been increasing recently, and any dips have been minimal.
The 14-day relative strength index (RSI) stands at 62.77, indicating a bullish momentum.
As long as the price stays above the rising 20-day EMA, the momentum looks favorable. A daily close above the 50% Fibonacci retracement of 1.3402 would reinforce a bullish trend and possibly allow for a move towards the October 17 high of 1.3471. However, should it fail to breach that resistance, a retracement may lead to a decline toward the 38.2% Fibonacci area, while keeping the pair relatively strong.
