Pound sterling (GBP) recovered its daily losses and turned positive against the US dollar (USD) in the North American session on Tuesday after falling near psychological support at 1.2500 in Asian trading hours. GBP/USD rises as USD gives up full daily gains after strong opening.
The US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, opened superbly after President-elect Donald Trump warned that he would impose 25% tariffs on all products from Canada and Mexico. Trump added that there will be an additional 10% tariff on imports from China to pump illicit drugs into the United States via Mexico.
However, the US dollar gave up more than half of its gains amid expectations that Trump’s nomination of Scott Biscent for Treasury Secretary would maintain geopolitical stability in parallel with achieving Trump’s economic agenda. In an interview with the Financial Times (FT) over the weekend, Biscent said he would focus on enacting tariffs, however, the targets would be “gradually accumulated.”
On the monetary policy front, investors await the US Personal Consumption Expenditure (PCE) Price Index (PCE) data for October, which will be published on Wednesday. Economists expect inflation data from September readings to accelerate year-on-year.
Inflation data will significantly affect market expectations regarding the possible interest rate move by the Fed at the December meeting. The likelihood of the Fed cutting interest rates by 25 basis points to the range of 4.25%-4.50% in December is 56%, while the rest prefer the central bank’s choice to keep interest rates steady.
In Tuesday’s session, investors will focus on the minutes of the November 7 FOMC meeting, which will be published at 19:00 GMT. At the policy meeting, the Fed cut interest rates by 25 basis points to a range of 4.50%-4.75%.
GBP trades sideways amid interest pressure
The pound traded sideways broadly against its major peers on Tuesday, as investors look for fresh signals about the Bank of England’s potential interest rate trajectory. Most Bank of England policymakers, including Governor Andrew Bailey, have supported a gradual policy easing approach, citing lingering concerns about price pressures.
If the GBP/USD market bounces back from here, we could see a move towards 1.27, the level from which the market bounced before dropping below it and then returning to the downside once it reaches that level again. In other words, there should be a lot of market memory in this region.
Bank of England Deputy Governor Claire Lombardelli said in a speech at King’s Business School on Monday, “I support the gradual removal of restrictions on monetary policy.” Lombardelli warned of the risk of inflation remaining above the bank’s forecast, with wage growth returning to normal at 3.5%-4% and the consumer price index (CPI) around 3% instead of 2%.
When asked about economic performance in the context of weak S&P Global/CIPS preliminary PMI data for November, Lombardelli said, “November’s preliminary PMIs may indicate some slowdown in the UK economy, but I’m not receiving a strong signal from a single release.”
Conversely, Bank of England foreign policy member Swati Dingra seems to support a less gradual approach to cutting interest rates because she does not see the UK as an anomaly in terms of inflation among advanced economies. Dingra added that politics weighs on investment. Traders currently expect the Bank of England to leave interest rates unchanged at 4.75% at its December policy meeting.
With all things being equal, the US dollar is undoubtedly one of the strongest currencies in the world right now. While the pound sterling itself is not so bad, it is not the US dollar.
Pound sterling rises against the Canadian dollar
The exchange rate of the British pound against the Canadian dollar (GBP/CAD) rose modestly on Monday despite a lack of economic engines, with risky market sentiment supporting the currency pair.
The GBP/CAD pair was trading at around C$1.7547, up 0.2% from Monday’s opening price.
The pound sterling (GBP) managed to hold steady against the majority of its peers at the beginning of the week despite the absence of any domestic economic data. This was due to the market’s appetite for risk, which led investors to choose the riskier assets over their safe-haven counterparts. Monday’s trading narrative supported the pound as an increasingly risk-sensitive currency, causing sterling exchange rates to rise, especially against its safer rivals.
The Canadian dollar (CAD) struggled to get offers against almost all of its peers on Monday as a lack of economic engines left “chromatic” trading without a clear direction. However, low oil prices put further pressure on the Canadian dollar exchange rates at the beginning of the week. As a currency pegged to crude oil, lower Brent and crude oil prices are weighing on the Canadian dollar, which happened at the beginning of the week.
Looking ahead, several high-impact data releases from the US will likely drive the movement of the GBP/CAD exchange rate in the middle of the week, as British and Canadian economic publications remain scarce.
Looking at the Canadian dollar, as the currency has a positive correlation with the US dollar (USD), any positive posts from America may boost the exchange rates of the Canadian dollar, thereby undermining the GBP/CAD exchange rate.
Turning to the pound, as an increasingly risk-sensitive currency, if positive US data pushes markets to choose safe-haven assets, sterling exchange rates could fall.
