Sterling Extends has shown impressive gains in European trade on Friday, hitting a two-week high and poised to record its best weekly profit in five weeks. This rise follows a series of positive economic data from the UK, which has bolstered investor confidence and weakened the odds of an imminent rate cut by the Bank of England (BOE).
Sterling’s Recent Performance
Price Movements
The GBP/USD pair increased by 0.25% to $1.2889, reaching its highest level since July 25. The session saw a low of $1.2852. This uptick follows a 0.2% gain on Thursday, marking the sixth profit in seven days. The pound’s recent performance highlights growing optimism about the UK economy and its currency.
Weekly Gains
For the week, the pound is up 1% against the US dollar, set to mark its first weekly gain in five weeks. This positive trend reflects market expectations of a narrowing interest rate gap between the US and the UK, as well as improved economic indicators from the UK.
Economic Data Supports Sterling
UK Growth
Official data revealed that the UK’s GDP grew by 0.6% in the second quarter, meeting expectations. This growth rate indicates that the UK economy remains robust, at the upper end of its pre-COVID-19 growth range. Analysts from Capital Economics suggest that this growth, combined with tapering inflation, might provide the BOE with the confidence needed to hold off on further rate cuts.
Retail Sales Data
UK retail sales also demonstrated resilience, rising by 0.5% in July. This figure matched estimates and further underscored the strength of the UK economy. The consistent performance of retail sales supports the notion that consumer spending remains healthy, bolstering the currency.
Bank of England and Market Expectations
Odds of a Rate Cut
Following the positive economic data, market expectations for a 0.25% rate cut by the BOE in September have decreased to 40%. The reduction in rate cut bets has supported the pound, as investors anticipate a more stable interest rate environment in the UK.
Impact on Sterling
The diminished odds of a rate cut have strengthened Sterling, as traders adjust their positions in response to the updated economic outlook. This shift in expectations has contributed to the pound’s recent gains and improved its performance against major currencies.
US Interest Rate Expectations
Federal Reserve’s Stance
According to the Fedwatch tool, the probability of a 0.5% interest rate cut by the Federal Reserve in September is now at 22%, with a smaller 0.25% rate cut holding an 78% chance. These figures reflect a nuanced view of the US economy, balancing strong economic data with ongoing inflation concerns.
Rate Gap Analysis
The current interest rate gap between the UK and the US stands at 50 basis points in favor of the US. However, this gap is expected to narrow to 25 basis points by September. This anticipated adjustment could influence the pound’s performance, potentially reducing the pressure on Sterling and enhancing its competitiveness.
Conclusion
Sterling Extends rally to a two-week high and its expected weekly gains reflect a positive shift in market sentiment, driven by strong UK economic data and revised expectations for BOE policy. As the interest rate gap between the UK and the US narrows, Sterling’s performance may continue to improve, supported by ongoing economic resilience and stable retail sales.
FAQs
1. Why has Sterling risen to a two-week high?
Sterling Extends risen due to positive UK economic data and reduced odds of a Bank of England rate cut
which have bolstered investor confidence.
2. What is the current status of the GBP/USD pair?
The GBP/USD pair has increased by 0.25% to $1.2889
marking a two-week high and reflecting a positive trend in Sterling’s performance.
3. How did recent UK economic data impact Sterling?
Strong UK GDP growth and resilient retail sales data have decreased the likelihood of an imminent BOE rate cut, supporting Sterling’s rise.
4. What are the current expectations for US interest rates?
The odds of a 0.5% rate cut by the Federal Reserve have fallen to 22%
with a 0.25% cut now more likely at 78%, according to the Fedwatch tool.
5. How is the interest rate gap between the UK and the US expected to change?
The interest rate gap between the UK and the US is currently 50 basis points and is expected to narrow to 25 basis points by September.