The British pound rose 0.1% to approach 1.3360 against the US dollar during the European trading session on Friday. The GBP/USD pair rose as the US dollar fell to a five-week low, with traders remaining confident that the Federal Reserve (Fed) will cut interest rates at next week’s monetary policy meeting.
At press time, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading cautiously near a five-week low around 98.75.
According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 25 basis points to 3.50%-3.75% at its December policy meeting is 87%.
The Federal Reserve’s strong dovish outlook is supported by weak US labor market conditions. The private sector lost 32,000 jobs in November, while 5,000 new workers were expected to be added, the US ADP report said on Wednesday.
Minutes from the October Federal Open Market Committee (FOMC) meeting also showed that policymakers acknowledged downside labor market risks and the need to ease monetary conditions further. However, many members opposed interest rate cuts in December.
In Friday’s session, investors will focus on US Personal Consumption Expenditure Price Index data for September, which will be released later in the day. However, it may have little impact on expectations for the Fed’s next move, given the data lag.
US dollar price this week
The table below shows the percentage change in the US Dollar (USD) against the major currencies listed this week. The US dollar was weakest against the Australian dollar.
| US dollars | euro | GBP | JPY | Canadian | Australian dollar | New Zealand dollar | Swiss franc | |
|---|---|---|---|---|---|---|---|---|
| US dollars | -0.42% | -0.72% | -0.62% | -0.22% | -1.19% | -0.64% | -0.02% | |
| euro | 0.42% | -0.30% | -0.18% | 0.23% | -0.77% | -0.22% | 0.40% | |
| GBP | 0.72% | 0.30% | 0.35% | 0.50% | -0.48% | 0.08% | 0.70% | |
| JPY | 0.62% | 0.18% | -0.35% | 0.40% | -0.59% | -0.03% | 0.59% | |
| Canadian | 0.22% | -0.23% | -0.50% | -0.40% | -1.02% | -0.42% | 0.19% | |
| Australian dollar | 1.19% | 0.77% | 0.48% | 0.59% | 1.02% | 0.56% | 1.18% | |
| New Zealand dollar | 0.64% | 0.22% | -0.08% | 0.03% | 0.42% | -0.56% | 0.62% | |
| Swiss franc | 0.02% | -0.40% | -0.70% | -0.59% | -0.19% | -1.18% | -0.62% |
The heat map shows the percentage changes in major currencies versus each other. The base currency is chosen from the left column, while the counter currency is chosen from the top row. For example, if you select USD from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The pound benefits from the UK budget and the upwardly revised Purchasing Managers’ Index (PMI).
- The British pound seeks to extend its recent rise against its major counterparts on Friday. The British currency has outperformed its counterparts for more than a week, driven by the UK Budget announced on November 26, and an upward revision in S&P’s global Purchasing Managers’ Index (PMI) data for November.
- The budget announced by Treasurer Rachel Reeves last week revealed Labor’s plans to raise £26 billion in taxes to close the financial gap without imposing a financial burden on families.
- Financial market participants were concerned ahead of the budget announcement that the government might break with self-imposed fiscal rules to address welfare spending measures, a scenario that could have boosted UK bond yields. However, the government passed the bond market test and also introduced extensive investment plans.
- On Wednesday, S&P Global reported that its composite PMI rose to 51.2 from a preliminary reading of 50.5, alleviating fears of a decline in business activity.
- From now on, the main driver of the pound will be market expectations of the Bank of England’s (BoE) monetary policy outlook. The Bank of England is expected to cut interest rates at its next meeting on December 18 to support weak labor market conditions.
Technical Analysis: GBP/USD is witnessing further rise above 1.3400
The pound is trading solidly near its monthly high of 1.3385 against the US dollar, which was hit on Thursday. The pair is holding above the bullish 20-day exponential moving average (EMA) at 1.3227, maintaining a positive near-term bias. The 20-day EMA has been sloping higher in recent sessions, and the declines remain shallow.
The 14-day Relative Strength Index (RSI) at 62.77 reflects bullish momentum.
Momentum remains supportive, while the price remains above the bullish 20-day EMA. A daily close above the 50% Fibonacci retracement level at 1.3402 would reinforce the bullish tone and open room for a continuation towards the October 17 high at 1.3471. On the contrary, failure to break this barrier would maintain the pair’s consolidation, with pullbacks tending towards the 38.2% Fibonacci area and trend support.
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the New York Fed president, and four of the remaining eleven regional Fed presidents, who serve one-year terms on a rotating basis.
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.
