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British Pound Weakens Against U.S. Dollar Amid Market Uncertainty

A Report by CYS Global Remit Counterparty Sales & Alliance Unit 



The British Pound (GBP) weakened against the U.S. Dollar (USD) on Tuesday, continuing its sideways trend since the Bank of England’s June policy meeting, which left interest rates unchanged. With inflation easing significantly, there is anticipation of a rate cut in August, limiting Sterling’s potential gains. 


Focus on U.S. Economic Events and Political Concerns 

This week, the spotlight shifts to U.S. economic events and political concerns impacting the GBP/USD pair. Federal Reserve Chair Jerome Powell is scheduled to speak today, followed by the release of minutes from the latest rate-setting meeting on Wednesday. These events set the stage for Friday’s crucial non-farm payrolls report, which could significantly influence market movements. 


The USD has experienced a slight increase due to market concerns over a potential second term for Donald Trump and the associated risk of heightened tariffs. These concerns have boosted bond yields and reduced risk appetite. Despite this, the market remains confident that the Federal Reserve will begin cutting rates in September, albeit cautiously, which restrains the Dollar. 


Pressure on the Sterling Pound 

The Sterling Pound remains under pressure but has recovered some losses from earlier on Tuesday. The upcoming United Kingdom General Election on Thursday seems to have minimal impact on the currency, with a Labour Party victory already priced in.


GBP/USD has been in a downtrend since mid-June, with trading ranges narrowing as the new month begins. Support is seen at 1.26212, limiting short-term bearish targets. The pair is currently hovering around its 50- and 100-day moving averages. A solid rise above these levels might lead to more consolidation. Sterling bulls face challenges in regaining highs above 1.26972, which dominated from May to mid-June. The downtrend is expected to continue this week, though any declines might not be substantial. 


GBP/USD Gains Momentum 

On Wednesday, the GBP/USD pair traded positively around 1.2688 for the fifth consecutive day. The decline of the USD Index below the 106.00 level supports the pair. Investors are looking ahead to key U.S. economic data, including June ADP Employment Change, ISM Services PMI, and the FOMC meeting minutes, due later in the day. 


On Tuesday, U.S. Federal Reserve Chair Jerome Powell noted that U.S. inflation is cooling after higher readings earlier this year but emphasized the need for more evidence before considering interest rate cuts. Powell highlighted the strength of the U.S. economy and job market, suggesting that the central bank can afford to be patient in deciding rate cuts.


Additionally, Chicago Fed President Austan Goolsbee acknowledged “warning signs” of economic weakness, indicating the Fed’s goal to lower inflation without straining the labor market. The probability of a 25 basis point rate cut in September has increased slightly, placing selling pressure on the USD. 


Conversely, the GBP has edged higher against the USD despite expectations of early rate cuts by the Bank of England (BoE). Investors currently anticipate the UK central bank to start cutting interest rates at its meeting in August. Michael Field, European market strategist at Morningstar, noted, “The MPC is following the data. The data is clearly moving in the right direction, and therefore, rate cuts will have to follow.” 


Fed’s Dovish Tone and Anticipated Rate Cuts 

The USD dipped on Tuesday amid thin, choppy trading after Powell struck a moderately dovish tone, hinting that the Central Bank may start its easing cycle later this year. Speaking at a monetary policy conference in Portugal, Powell stated that the U.S. has made significant progress on inflation, moving back towards a disinflationary path, comments which were perceived to be dovish. 


Powell's remarks overshadowed data showing an increase in U.S. job openings in May after significant declines in the previous two months. According to the Job Openings and Labor Turnover Survey (JOLTS) report, job openings rose by 221,000 to 8.140 million at the end of May. Economists had forecasted 7.910 million job openings for May, with April's figures revised down to 7.919 million from the previously reported 8.059 million. 


"Powell didn't really say anything new, but his tone was slightly dovish," said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull in Toronto, noting that this helped push the dollar slightly lower. Bregar added that the JOLTS report, despite its surface strength, was not as robust due to the downward revision of April's figures. Following the JOLTS report and Powell's comments, U.S. rate futures have priced in a 69% chance of a rate cut in September, up from about 63% on Monday, according to LSEG calculations. The market has also priced in one to two rate cuts in 2024. 


Summary 

While major U.S. events this week could offer GBP/USD trading opportunities, they are unlikely to cause lasting shifts unless they change current interest-rate expectations. In summary, the British Pound is under pressure due to the Bank of England’s steady policy, while U.S. economic indicators and Federal Reserve actions dominate the focus for GBP/USD. Both currencies face challenges from their respective political and economic landscapes, making significant, lasting movements unlikely in the short term. 

 

 

 

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