On Monday’s European session, the Pound Sterling (GBP) maintained its position around 1.2670, with investors expressing confidence that the Bank of England (BoE) is unlikely to lower interest rates in the near future. The United Kingdom’s (UK) inflation rate, the highest among the Group of Seven economies (G-7), has compelled BoE policymakers to keep interest rates in restrictive territory for an extended period.
The robust wage growth in the services sector, contributing to inflation, has kept the UK’s core Consumer Price Index (CPI) resilient. BoE policymakers assert that the growth in labor costs and service inflation exceeds the necessary pace for inflation to sustainably return to the 2% target.
The Pound Sterling benefits from the prospect of higher interest rates, attracting increased foreign inflows. The light UK economic calendar for the week leaves market sentiment to guide the GBP/USD pair.
In the United States, Federal Reserve (Fed) Chair Jerome Powell’s congressional testimony and the Nonfarm Payrolls (NFP) data will influence market sentiment, providing insights into the potential timing of interest rate reductions by the Fed.
The US Dollar faces a sell-off following weak Manufacturing PMI figures reported by the United States Institute of Supply Management (ISM) for February. The poor New Orders Index and indications of increased layoffs in the manufacturing sector paint a bleak economic outlook.
Meanwhile, the S&P Global/CIPS reports a positive Manufacturing PMI for February in the UK, standing at 47.5, the highest since April 2023. Despite beating expectations, the index remains below the 50.0 threshold for the 19th consecutive month, signaling a contraction. The report attributes challenges to New orders intake, client destocking, subdued market confidence, and financial pressures. The Red Sea crisis-induced supply chain disruptions have presented difficulties for factory owners, delaying raw material deliveries and causing inflated input prices.
Looking ahead, market expectations regarding the timing of rate cuts by the Bank of England will be a significant factor guiding the Pound Sterling. Investors anticipate a potential reduction in the BoE’s key interest rate from August, but policymakers may lean towards maintaining rates at 5.25% until they are confident in achieving the desired 2% inflation rate.
