• The Pound Sterling retraces against the US Dollar to near 1.3355 ahead of a slew of US economic data, notably the Q1 GDP release.
  • The US economy is expected to have expanded at a slight pace of 0.4% in the January-March period.
  • BoE Greene expects Trump’s tariff policy to be net disinflationary for the economy.

The Pound Sterling (GBP) extends correction to near 1.3355 against the US Dollar (USD) in Wednesday’s European session from its fresh three-year high of 1.3445 posted on Tuesday. The GBP/USD pair drops slightly as the US Dollar (USD) ticks higher ahead of a string of top-tier key United States (US) economic data, notably the preliminary Q1 Gross Domestic Product (GDP) data release in the North American session.

The US Bureau of Economic Analysis (BEA) is expected to report that the economy grew at a slower pace of 0.4% on an annualized basis, much lower than the prior reading of 2.4%. Economists have anticipated a moderate GDP growth on expectations of a slowdown in economic activity in the face of hefty tariffs imposed by US President Donald Trump earlier this month. 

Trump’s sweeping additional tariffs on its trading partners have led to an increase in global economic uncertainty, including in the US. Theoretically, Trump’s protectionist policies should prompt domestic industry to ramp up their production to offset lower imports, but ever-changing headlines from the White House over import duties have forced them to put their expansion plans on hold.

Additionally, investors will focus on the Q1 Employment Cost Index, ADP Employment Change data for April, and the Personal Consumption Expenditure Price Index (PCE) data for March. The Employment Cost Index, which measures change in total employee cost for a company, is expected to have risen steadily by 0.9%. In the US private sector, employers are expected to have hired 108K fresh workers in April, significantly lower than 155K in March.

Meanwhile, the core PCE inflation data, which is the Federal Reserve’s (Fed) preferred inflation gauge, is expected to have grown by 2.6%, slower than the 2.8% increase seen in February. 

Signs of easing job growth and cooling inflationary pressures would boost market expectations that the Fed could reduce interest rates in the June policy meeting. According to the CME FedWatch tool, there is a 65% chance that the central bank will reduce interest rates in June. For the May policy meeting, traders are almost fully pricing in that the Fed will keep interest rates unchanged in the range of 4.25%-4.50%.

Fed officials have indicated that interest rates should remain at their current level until they get clarity on how new economic policies by Donald Trump shape the economic outlook. On Tuesday, Trump criticized Fed Chair Jerome Powell again for not lowering interest rates, while commemorating his first 100 days in office. Trump didn’t mention Powell explicitly, but his comments and past record with him indicated so.

“You’re not supposed to criticize the Fed, you’re supposed to let him do his own thing, but I know much more than he does about interest rates, believe me,” Trump said. 

Daily digest market movers: Pound Sterling underperforms as BoE seems to cut interest rates in May

  • The Pound Sterling underperforms its peers, except the Japanese Yen (JPY), in European trading hours on Wednesday as traders have become increasingly confident that the Bank of England (BoE) will reduce interest rates by 25 basis points (bps) in its monetary policy meeting on May 8. BoE dovish bets have escalated amid fears that the new tariff policy by the US will ease inflationary pressures and weaken United Kingdom (UK) economic growth.
  • BoE policymaker Megan Greene said that the potential trade war would be “net disinflationary” for the UK economy, in a discussion with the Atlantic Council think tank on Friday. Greene warned about shockwaves in the job market in the face of an increase in employers’ contribution to social security schemes to 15% from 13.8%, which has become effective this month.
  • Last week, BoE Governor Andrew Bailey stressed the need to consider trade war risk by the central bank. "We do have to take very seriously the risk to growth, Bailey said at the sidelines of the International Monetary Fund’s (IMF) Spring Meetings in Washington. 
  • This week, the UK economic calendar has nothing important to offer. Therefore, external forces would be the key driver of the British currency. 
  • The Pound Sterling has remained underpinned against the US Dollar amid elevated uncertainty over the US-China trade war. Washington wants China to initiate trade discussions with them, given its significant reliance on their exports to the US. “I believe that it’s up to China to de-escalate, because they sell five times more to us than we sell to them, Bessent said in an interview on CNBC’s Squawk Box on Monday. Meanwhile, Beijing has vowed to fight the tariff war to protect its interests and dignity.

Technical Analysis: Pound Sterling retraces below 1.3400

The Pound Sterling retraces below 1.3400 against the US Dollar from the three-year high of 1.3445. However, the overall outlook of the pair remains bullish as all short-to-long Exponential Moving Averages (EMAs) are sloping higher.

The 14-day Relative Strength Index (RSI) rebounds after cooling down to 60, currently at around 65, indicating a resurgence in the upside trend.

On the upside, the round level of 1.3600 will be a key hurdle for the pair. Looking down, the April 3 high around 1.3200 will act as a major support area.

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

Source: Fxstreet