The Pound Sterling has strengthened as market expectations lean towards a moderate policy-easing cycle from the Bank of England (BoE) this year. Positive economic indicators, such as robust UK Retail Sales, higher-than-anticipated Consumer Price Index data for January, and strong wage growth, have reduced dovish bets on the BoE.
Traders now foresee two more interest rate cuts from the BoE in 2023, following a recent 25 basis point reduction to 4.5%. Analysts speculate that uncertainty surrounding potential tariffs may compel the BoE to cut rates four times, pushing the forecast for the next cut to May.
Upcoming speeches from BoE policymakers may provide additional insights into monetary policy. The release of PMI data for February showed a slight contraction in manufacturing and expansion in services, with composite PMI at 50.5.
The GBP/USD pair faced resistance near 1.2700 in North American trading, while the US Dollar Index recovered to approximately 106.50 after falling earlier in the day. The US business activity data indicated a slowdown, with the Services PMI dropping to 49.7, marking the first contraction in 25 months.
Market expectations for the Federal Reserve’s interest rate cuts have shifted, with 41.1% probability now for rates to remain unchanged. The Manufacturing PMI exceeded estimates, rising to 51.6, reflecting a positive impact from tariffs.
This week, focus will shift to US Durable Goods Orders and Personal Consumption Expenditures data. The Pound Sterling continues to seek support around 1.2333, with resistance levels identified near 1.2770 and 1.2927.
The BoE’s main objective remains price stability, maintaining a 2% inflation target through interest rate adjustments. Higher rates typically strengthen the Pound, while lower rates may hinder its value. Quantitative Easing (QE) is a last-resort strategy, while Quantitative Tightening (QT) can reinforce the Pound’s strength when the economy improves.
The stance taken by the central bank, combined with recent economic figures, has provided traders with fresh insights into what to anticipate in the near term. With better-than-expected economic data, fewer market participants now expect aggressive rate cuts, which in turn bolsters the currency’s position. The steady performance in wage growth and consumer spending suggests that inflationary pressures may remain persistent, making it harder for monetary policymakers to justify rapid easing.
At the moment, markets are leaning towards the assumption that interest rates will come down twice more by year-end. However, some analysts argue that four rate cuts could be necessary should trade-related risks materialise. This uncertainty has prompted many to push back their forecasts for when the next rate adjustment might take place, with May emerging as the likeliest scenario. Investors will be paying close attention to any public comments from central bank officials, looking to gauge whether internal sentiment has shifted in response to the latest economic releases.
The latest purchasing managers’ index figures painted a mixed picture. While the manufacturing sector showed mild contraction, the service sector displayed enough resilience to keep overall activity in expansionary territory. A composite reading just above 50 signals that growth continues, albeit at a sluggish pace. Any deterioration in these figures over the coming months could reinforce the argument for quicker rate reductions.
Turning to currency markets, traders saw the British currency rise towards 1.2700 before sellers pushed it lower. The competing currency recovered after an earlier drop, with the gauge tracking its value bouncing back towards 106.50. The shift in Federal Reserve expectations played a role, as data indicating a slowdown in service sector activity raised concerns over future growth. A reading of 49.7 reflects the first contraction in more than two years, illustrating fading momentum. Despite this, the manufacturing sector showed surprising strength, topping expectations at 51.6, likely supported by changes in trade policy.
Looking ahead, upcoming figures on US durable goods and consumer spending will be closely scrutinised for their influence on market sentiment. The British currency continues to hold above 1.2333, with resistance forming near 1.2770 and 1.2927. These levels provide traders with a reference point when assessing short-term price movements.
At its core, the monetary authority remains committed to keeping inflation around 2%. Adjustments to interest rates serve as the main tool for achieving this objective, though other strategies, such as asset purchases or unwinding previous stimulus measures, remain options under certain conditions. A period of elevated borrowing costs generally lifts the currency, whereas a dovish pivot could limit its upside. If conditions warrant, changes in the approach to liquidity management could also influence market dynamics.
