The Pound Sterling (GBP) performs strongly against its major peers, except the Euro (EUR), ahead of the Bank of England’s (BoE) monetary policy decision, which will be announced at 12:00 GMT. The BoE is expected to leave interest rates unchanged at 4.75% with an 8-1 vote split. The Monetary Policy Committee (MPC) member who is expected to vote for a 25-basis points (bps) interest rate reduction is Swati Dhingra, who has been consistently supporting a more expansionary policy stance.

The BoE is almost certain to keep interest rates steady as inflationary pressures in the United Kingdom (UK) have accelerated in the last two months. The UK Consumer Price Index (CPI) data for November showed that annual headline inflation accelerated to 2.6%, as expected, from 2.3% in October. The core CPI—which excludes volatile items such as food, energy, alcohol, and tobacco—rose to 3.5% from the former reading of 3.3%.

Investors will pay close attention to BoE’s guidance on the policy outlook. "We think it's too early for the BoE to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated," analysts at Bank of America (BofA) said. 

According to market expectations, the BoE is expected to cut interest rates three times in 2025.

On the economic data front, investors will focus on the UK Retail Sales data for November, which will be released on Friday. Retail Sales, a key measure of consumer spending, are expected to rise by 0.5% on month after declining by 0.7% in October.

Daily digest market movers: Pound Sterling gains against USD, but broader outlook remains bearish

The Pound Sterling recovers to near 1.2660 against the US Dollar (USD) in Thursday’s London session after plunging to near 1.2560 on Wednesday. The GBP/USD pair rebounds as the US Dollar’s (USD) rally has paused after refreshing a two-year high. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, edges lower but holds the key support of 108.00.

The Greenback soared as the Federal Reserve (Fed) signaled fewer interest rate cuts for 2025 after cutting them by 25 bps to 4.25%-4.50%. The Fed’s dot plot showed that policymakers see Federal Fund rates heading to 3.9% in 2025, upwardly revising the projections from the 3.4% estimated in September.

Fed Chair Jerome Powell said at the press conference that economic strength gives the Fed the ability to approach rate cuts cautiously. When asked about the inflation outlook, Powell said he expects “inflation to continue to come down toward the 2% goal, on a 'sometimes bumpy' path”. Meanwhile, the Federal Open Market Committee (FOMC) has also raised core Personal Consumption Expenditure inflation (PCE) projections for 2025 to 2.5% from 2.2% in its latest economic projections.

Analysts at Monex Europe expect the Fed to hold interest rates at their current levels at least through the first half of 2025.

Technical Analysis: Pound Sterling recovers from 1.2550

The Pound Sterling recovers sharply after refreshing a three-week low near 1.2555 against the US Dollar on Thursday. The GBP/USD pair rebounds as the upward-sloping trendline, which is plotted from October 2023 low around 1.2035, remains a key support zone below 1.2600.

The 14-day Relative Strength Index (RSI) hovers near 40.00. A breakdown below the same could trigger a downside momentum.

A death cross, represented by the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.2790, suggests a strong bearish trend in the long run.

Looking down, the pair is expected to find a cushion near the psychological support of 1.2500. On the upside, the 200-day EMA near 1.2815 will act as key resistance.

Pound Sterling FAQs

What is the 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 unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Sweden's central bank will likely cut its key rate by a quarter point, with further policy easing ahead early next year if inflation remains under control, a Reuters poll of economists showed.

A line chart of the movement of the US Dollar Index stock index over the last 365 days. None

Source: Reuters

Source: AP

(Dec 19): A surge in gold imports that widened India’s trade deficit to a record last month and pushed the rupee to an all-time low was due to an error in calculation, according to people with knowledge of the matter.

Officials double-counted gold shipments in warehouses following a change in methodology in July, the people said, asking not to be identified ahead of an expected formal clarification. Attempts are on to reconcile the data, which could have been over-estimated by as much as 50 tonnes in November or almost 30% of total imports of the precious metal that month, some of the people said.

If an error is indeed identified, the trade figures are likely to be revised and traders could expect some correction in the foreign-exchange rate. It would also soothe feverish speculation about the state of the economy triggered by the data, as economists pondered over whether the surge in gold purchases signalled distress and a need to hedge against inflation or a move that indicated prosperity in the hinterland caused by a healthy crop.

“The rise in gold imports this November cannot be explained by festive demand alone, in our view, and represents a meaningful step up in gold purchases for reasons unclear (to us),” Nomura Holdings Inc analysts Sonal Varma and Aurodeep Nandi had written in a note after the trade numbers were published.  

India’s trade deficit ballooned to an unprecedented US$37.8 billion (RM170.2 billion) in November, driven by a fourfold increase in gold imports to a record US$14.8 billion, from just US$3.44 billion a year ago. While gold imports have risen steadily since the government cut duties on the precious metal to 6% from 15% in the July budget, the sharp spike had stumped analysts.

Even after adjusting for a 30% overestimation of gold, the November trade deficit would still stand at an elevated level of US$33.4 billion, said Varma in an email Thursday. Before the trade data was released, economists had forecast a US$23 billion gap for the month in a Bloomberg survey. 

Notwithstanding the error in calculation, economists are worried about the surge in import of the precious metal. “Gold imports are growing at a faster pace this year on top of a higher base last year. That needs a much closer monitoring,” said Gaurav Kapur, chief economist of IndusInd Bank Ltd. The declining goods exports exacerbates the problem for the country, he said.

The rupee continued to weaken against the dollar and tumbled to a fresh low of 85.07 after the US Federal Reserve announced another interest rate cut overnight, but dialed back expectations for further reductions next year, triggering losses across Asian currencies.

The Indian currency could weaken to 85.50 per dollar over the near term, weighed by uncertainty over tariff policies of the incoming Trump administration as well as a weakening Chinese yuan, said Kunal Sodhani, vice-president at Shinhan Bank.

According to people familiar with India’s import system, officials probably added up imports kept by custodians in free trade zone warehouses with tallies reported by domestic banks that buy the gold from the custodians.

Typically, the gold isn’t considered an import until it is checked out from the warehouse. However, a recent integration of customs clearing systems is being identified as the potential culprit.

Until the end of June, bills of entry for ‘warehousing’ and ‘ex-bond goods’ — both not considered as imports — were maintained by SEZ Online, a Department of Commerce system, while the bill of entry for ‘house consumption’ — which is considered actual import — was handled by the Indian Customs Electronic Commerce/Electronic Data Interchange, or ICEGATE. Since July, ICEGATE has integrated both custodian and consumption data in a common system for faster data dissemination.

Emails to ICEGATE principal director general Yogendra Garg and the Trade Ministry spokesman weren’t immediately answered.

The double counting may have gone unnoticed earlier, but became apparent only in November because domestic prices went into a discount of at least 10% from international prices, triggering increased purchases that disproportionately pushed up import figures. 

Overall imports of gold could still be within the 800-1,000 tonnes that India ships in annually, some of the people said, adding however that the final reconciliation hasn’t yet been arrived at.

Source: Theedgemarkets

The USD/CAD pair extends its steady intraday retracement slide from the highest level since March 2020 and drops back closer to the 1.4400 mark during the first half of the European session on Thursday. The uptick could be attributed to some profit-taking amid the overbought conditions on the daily chart, though the fundamental backdrop seems tilted firmly in favor of bulls. 

The Federal Reserve (Fed) offered a more hawkish view and signaled a cautious path of policy easing next year, which remains supportive of a further rise in the US Treasury bond yields to a multi-month peak. Apart from this, geopolitical risks and trade war fears should continue to act as a tailwind for the US Dollar (USD). Apart from this, the political crisis in Canada, the Bank of Canada's (BoC) dovish stance and a downtick in Crude Oil prices could undermine the commodity-linked Loonie. This might contribute to limiting the downside for the USD/CAD pair. 

From a technical perspective, the Relative Strength Index (RSI) remains above the 70 mark and prompts some long unwinding around the USD/CAD pair. That said, this week's breakout through a multi-week-old ascending channel was seen as a key trigger for bullish traders and supports prospects for the emergence of dip-buying at lower levels. Hence, any further corrective slide below the 1.4400 round figure is likely to find decent support and remain limited near the aforementioned ascending trend-channel breakout point, around the 1.4335-1.4330 region. 

This is closely followed by the 1.4300 mark, which if broken decisively might prompt some technical selling and drag the USD/CAD pair to the next relevant support near the 1.4250 horizontal zone. The downward trajectory could extend further towards the 1.4220-1.4215 region en route to the 1.4200 round figure. 

On the flip side, the 1.4450 zone now seems to act as an immediate hurdle. Some follow-through buying beyond the 1.4465 area, or the multi-year top, should allow the USD/CAD pair to reclaim the 1.4500 psychological mark. The subsequent move-up has the potential to lift spot prices to the 1.4560 intermediate hurdle en route to the 1.4600 round figure and March 2020 swing high, around the 1.4665-1.4670 region.

Source: FXSTREET