Pound Sterling outperforms US Dollar on renewed concerns over Greenback’s credibility
- The Pound Sterling refreshes a three-year high near 1.3600 against the US Dollar due to US President Trump’s ever-changing tariff announcements on the EU.
- Trump threatens to impose 25% duties on Apple for not manufacturing in the US.
- Traders see the BoE reducing interest rates just once in the remainder of the year.
The Pound Sterling (GBP) posts a fresh three-year high near 1.3600 against the US Dollar (USD) at the start of the week, amid holidays in the United Kingdom (UK) and the United States (US) markets on account of the Spring Bank Holiday and Memorial Day, respectively. The GBP/USD pair, trading around 1.3567 at the time of writing on Monday, has extended the upside as the US Dollar slides further after “ever-changing” tariff announcements by US President Donald Trump on imports from the European Union (EU) have renewed concerns over its safe-haven appeal.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 98.70, the lowest level seen in a month.
During the weekend, Trump suspended 50% tariffs on the EU until July 9, which were expected to become effective from June 1. His decision came after discussions with European Commission President Ursula von der Leyen. "We had a very nice call, and I agreed to move it," Trump affirmed and added, "She said we will rapidly get together and see if we can work something out," Reuters reported.
On Friday, the US President imposed 50% flat tariffs on imports from the old continent after Brussels sent a not-so-good trade proposal to Washington.
US Treasury Secretary Scott Bessent also warned that the EU is “not negotiating in good faith” in an interview with Fox News.
Daily digest market movers: Pound Sterling gains as traders reassess BoE dovish bets
- The Pound Sterling gains against the US Dollar as the latter suffers from erratic announcements by Washington on its tariff policies. Though the decision by US President Trump to postpone additional import duties has provided relief to European and the US markets, investors continue to doubt the credibility of the Greenback. During European trading hours, S&P 500 futures are up over 1%.
- Another reason behind weakness in the US Dollar is Donald Trump’s 25% tariff threat to Apple and other smartphone manufacturers for not manufacturing in the US. Investors see the event as an assault by the administration on the autonomy of the private sector, potentially dampening business confidence.
- Meanwhile, Federal Reserve (Fed) officials continue to warn about potential stagflation risks in the wake of new economic policies announced by Washington. “There’s no question that the shock of tariffs is stagflationary,” Minneapolis Federal Reserve President Neel Kashkari said in an interview with Bloomberg TV earlier in the day. Kashkari guided that any monetary policy adjustment is unlikely, at least before September, as officials seek more clarity on how new policies will influence the economic outlook. “Uncertainty is something that is top of the mind for the Fed and US businesses, and we’re trying to navigate where inflation and the labor market are going,” he added.
- Meanwhile, the Pound Sterling is also outperforming its other peers, except antipodeans, during European trading hours on Monday. The British currency gains as financial market participants reassess expectations for the Bank of England’s (BoE) monetary policy outlook after the release of the stronger-than-projected growth in the UK Consumer Price Index (CPI) and Retail Sales data for April.
- Last week, the UK CPI report showed that the headline inflation rose at a robust pace of 3.5% on year against 2.6% growth seen in April. In the same period, inflation in the services sector, which is closely tracked by BoE officials, accelerated to 5.4% from the prior release of 4.7%. Meanwhile, Retail Sales grew strongly by 1.2% on month, compared to estimates of 0.2% and 0.1% growth seen in March. Theoretically, hot inflation and strong Retail Sales data discourage BoE officials from lowering interest rates, a scenario that is favorable for the Pound Sterling.
- According to a report from Reuters, the futures market shows traders see UK rates falling by around 38 basis points (bps) by the end of this year, which would imply one 25 bps interest rate cut and a roughly 50/50 chance of a second.
Technical Analysis: Pound Sterling jumps to near 1.3600
The Pound Sterling posts a fresh three-year high around 1.3600 against the US Dollar on Monday. The near-term trend of the GBP/USD pair remains bullish as all short-to-long term Exponential Moving Averages (EMAs) are sloping higher.
The 14-day Relative Strength Index (RSI) rises to near 67.00, indicating a strong bullish momentum.
On the upside, the 13 January 2022 high of 1.3750 will be a key hurdle for the pair. Looking down, the April 28 high of 1.3445 will act as a major support area.
Pound Sterling FAQs
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).
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.
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.
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.