Pound Sterling outperforms US Dollar as Fed seems to cut rates next week
- The Pound Sterling aims to extend its upside further due to multiple tailwinds.
- UK S&P Global Composite PMI is revised higher to 51.2 in November.
- Investors expect both the Fed and the BoE to cut interest rates this month.
The Pound Sterling (GBP) trades 0.1% higher to near 1.3360 against the US Dollar (USD) during the European trading session on Friday. The GBP/USD pair gains as the US Dollar retreats to near its five-week low, with traders remaining confident that the Federal Reserve (Fed) will cut interest rates in its monetary policy meeting next week.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades cautiously near its five-week low around 98.75.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December policy meeting is 87%.
Firm Fed dovish expectations are backed by weakening US job market conditions. The US ADP reported on Wednesday that the private sector shed 32K jobs in November, while it was expected to add 5K fresh workers.
The minutes of the Federal Open Market Committee (FOMC) meeting in October also showed that policymakers acknowledged downside labor market risks and the need to loosen monetary conditions further. However, several members argued against reducing interest rates in December.
In Friday’s session, investors will focus on the US Personal Consumption Expenditure Price Index (PCE) data for September, which will be released later in the day. However, its impact might be insignificant on expectations towards the Fed's next step, as it is delayed data.
US Dollar Price This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.42% | -0.72% | -0.62% | -0.22% | -1.19% | -0.64% | -0.02% | |
| EUR | 0.42% | -0.30% | -0.18% | 0.23% | -0.77% | -0.22% | 0.40% | |
| GBP | 0.72% | 0.30% | 0.35% | 0.50% | -0.48% | 0.08% | 0.70% | |
| JPY | 0.62% | 0.18% | -0.35% | 0.40% | -0.59% | -0.03% | 0.59% | |
| CAD | 0.22% | -0.23% | -0.50% | -0.40% | -1.02% | -0.42% | 0.19% | |
| AUD | 1.19% | 0.77% | 0.48% | 0.59% | 1.02% | 0.56% | 1.18% | |
| NZD | 0.64% | 0.22% | -0.08% | 0.03% | 0.42% | -0.56% | 0.62% | |
| CHF | 0.02% | -0.40% | -0.70% | -0.59% | -0.19% | -1.18% | -0.62% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Pound Sterling capitalizes on UK budget, upwardly revised PMI
- The Pound Sterling strives to extend its recent rally against its major currency peers on Friday. The British currency has been outperforming its peers for over a week, prompted by the United Kingdom (UK) budget announced on November 26, and an upward revision in the S&P Global Purchasing Managers’ Index (PMI) data for November.
- The budget announced by Chancellor of the Exchequer Rachel Reeves last week unveiled the Labour Party’s plans to raise 26 billion pounds in taxes to fill the fiscal hole without having a material burden on households.
- Financial market participants were worried before the budget announcement that the government might go against its self-imposed fiscal rules to address welfare spending measures, a scenario that could have promoted UK gilt yields. However, the government passed the bond market test and also presented large-scale investment plans.
- On Wednesday, the S&P Global reported that the Composite PMI rose to 51.2 from the preliminary reading of 50.5, which diminished fears of muted business activity.
- Going forward, the major trigger for the Pound Sterling will be market expectations for the Bank of England’s (BoE) monetary policy outlook. The BoE is expected to cut interest rates in the next meeting on December 18 to support weakening job market conditions.
Technical Analysis: GBP/USD sees more upside above 1.3400
The Pound Sterling trades firmly near its monthly high of 1.3385 against the US Dollar, posted on Thursday. The pair holds above a rising 20-day Exponential Moving Average (EMA) at 1.3227, maintaining a positive near-term bias. The 20-day EMA has sloped higher in recent sessions, and dips remain shallow.
The 14-day Relative Strength Index (RSI) at 62.77 reflects bullish momentum.
Momentum remains supportive, while price stays above the rising 20-day EMA. A daily close above the 50% Fibonacci retracement at 1.3402 would reinforce the bullish tone and open room for continuation towards the October 17 high of 1.3471. Conversely, failure to breach that barrier would keep the pair consolidating, with pullbacks leaning toward the 38.2% Fibonacci area and trend support.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.