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Pound Sterling bleeds lower, after release of Michigan Sentiment Index, breaks below 1.2500

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  • Pound Sterling vs US Dollar falls by over 100 pips on “Super Thursday”. 
  • BoE Governor Bailey suggests inflation may show a sharp fall in April data, UK growth data paints a more optimistic picture.
  • US Dollar strengthens on safe-haven flows after PacWest records large deposit outflows, renewing banking jitters. 

The Pound Sterling (GBP) continues bleeding lower against the US Dollar (USD) on Friday, following weakness triggered by the Bank of England (BoE) monetary policy meeting on the previous day. GBP/USD is now trading under 1.2500 after being pressured lower following the release of the Michigan Consumer Confidence Index which showed a decline to 57.7 from 63 and Michigan 5-year inflation expectations, which rose to 3.2% from 3.0% previously. 

From a technical perspective, GBP/USD is showing short-term bearish signs but overall remains in a long-term uptrend, advantaging long over short holders. 

GBP/USD market movers

  • The Pound Sterling found its feet earlier on Friday after the release of UK GDP data, which it had been feared would show the UK falling into a recession. 
  • Quarterly GDP, however, came out positive at 0.1%, in line with estimates. GDP YoY showed a 0.2% rise, also in line with forecasts. The month-on-month figure, however, showed a below-expectations decline of -0.3% when a 0.1% rise had been expected. 
  • On Thursday, a combination of dovish commentary at the BoE meeting and renewed banking crisis fears, supporting safe-haven flows to the US Dollar, led to a sharp decline in GBP/USD on Thursday. 
  • GBP/USD initially fell following the BoE’s announcement of its decision by a vote of 7-2 (the same ratio as last meeting) to raise interest rates by 0.25% bringing the Bank Rate to 4.50%.
  • The pair continued lower after BoE Chairman Andrew Bailey said, “The committee had good reason to believe headline inflation would fall considerably from April onwards”. 
  • Although the Pound Sterling recovered later when Bailey emphasized secondary effects and how “risks to inflation continue to be skewed to the upside as secondary effects persist”. 
  • GBP/USD renewed its sell-off after the US Dollar strengthened on safe-haven demand following the release of a securities filing by struggling US lender PacWest renewed US banking crisis fears. The filing revealed that the bank’s deposits had dropped nearly 10%, leading to a 20% sell-off in the bank’s shares. 
  • Headline inflation in the UK is at 10.1% which is more than double the 4.9% reading in the US. US and UK Core inflation are more similar, however, with US at 6.2% versus 5.5% in the UK. Nevertheless it suggests the UK will have to continue raising rates after the Federal Reserve (Fed) has stopped. This should benefit GBP over USD as global investors favor currencies with higher interest rates to park their money.
  • The CME Group FedWatch Tool is showing a 90% probability of no further interest rate hikes by the Fed. 
  • In addition, the Fed removed wording from its last statement saying that further monetary tightening would be appropriate if conditions warranted. The BoE, on the other hand, kept similar wording in its statement. 
  • The US Dollar is at risk from US debt ceiling default risk. US Treasury Secretary Janet Yellen warned on Thursday that a US default on a failure to raise the debt ceiling would produce an “economic and financial catastrophe.” Most analysts believe this would be USD-negative. 
  • The main release for the US Dollar on Friday is Michigan Consumer Sentiment Index which is forecast to fall to 63.0 in May for its preliminary reading. 

GBP/USD technical analysis: Shooting star reversal receives confirmation

GBP/USD sells off to below 1.2500 and shows signs it may extend lower, however, this does not change the broadly bullish long-term picture. The uptrend remains intact as long as the 1.2435 May lows hold, and thus still favors Pound Sterling longs over shorts, for now. 


GBP/USD: Daily Chart

On Wednesday, the market formed a shooting star Japanese candlestick reversal pattern on GBP/USD, indicating the possibility of a short-term bearish reversal. The pattern gained confirmation after Thursday’s bearish close. The expectation is for more downside in the short-term, probably to support at the base of the rising channel/wedge, located at around 1.2475. 


GBP/USD: Daily Chart

The Relative Strength Index (RSI) is falling sharply after showing mild bearish divergence between price at the May peaks and RSI. This is indicative of underlying weakness, and further suggests more short-term downside.

That said, given the overall trend is bullish, the GBP/USD exchange rate will probably recover and continue rallying. The May 2022 highs at 1.2665 provide the first resistance level, but once breached they open the way to the 100-week Simple Moving Average (SMA) situated at 1.2713, and finally at the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1.2758. All provide potential upside targets for the pair. Each level will need to be decisively breached to open the door to the next. Likewise for the bull trend to reverse, the 1.2435 lows will need to be decisively breached. 

Decisive breaks are characterized by long daily candles that break through key resistance levels in question and close near their highs or lows of the day (depending on whether the break is bullish or bearish). Alternatively, three consecutive candles that break through the level can also be decisive. Such insignia provide confirmation that the break is not a ‘false break’ or bull/bear trap. 

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, aka ‘Cable’, which < href=”https://fxssi.com/the-most-traded-currency-pairs”>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.

 

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