On Tuesday, the British pound continued to rise against the US Dollar and reached its highest level in September of $1.342.
The pound has gained six cents against the dollar in the past 10 days. This is the longest run of daily gains since 1971. Bloomberg reported that if it gains an additional cent today, this will be the longest daily gain streak since 1971.
As political pressure increases on the Federal Reserve, the US dollar is weakening.
The markets have responded strongly to the renewed attacks of former president Donald Trump. He has increased his call for lower interest rate and hinted that he may try to remove Fed chairman Jerome Powell.
Trump’s remarks have reignited concerns among investors about the independence of the central bank and brought new layers of uncertainty into an already fragile world outlook.
Trump presses Powell about monetary policy
Trump slammed Powell on Monday for continuing to “wait and watch” regarding monetary ease, warning against a possible economic downturn if rates are not cut.
Trump wrote on TruthSocial that “There could be a slowing of the economy, unless Mr. Too late, a major loser, lowers interest rate, NOW.”
Trump said, “I’m not pleased with him.” The comments followed an earlier promise to fire Powell. Believe me, I’ll get him out fast if I need to.
Investors and economists have been alarmed by the rhetoric. Many of them view central bank autonomy as an important cornerstone for financial stability.
On Tuesday, the US Dollar Index DXY (which tracks six of its major counterparts) fell to an all-time low. It was near 98.00.
The dollar has fallen due to fears that the Fed could be pushed into making premature rate reductions, which would destabilise financial markets.
Powell’s Next Move: Speculations are rife
Analysts are watching closely to see what the Fed does in response to an emergency rate reduction.
Francesco Pesole is ING Think’s FX Strategist. He noted, “There’s a chance Trump will not–or won’t be able–to take any drastic measures and Powell’s position.”
Pesole said that political pressures could increase, particularly in light of forecasts for weaker economic data.
OIS continues to indicate that the chances of an interest rate reduction in May are minimal.
However, traders are still cautious. This is especially true in light of Trump’s recent efforts to blame the Fed for any potential economic slowdown. Some argue that this signals the government’s recognition of looming risks.
UK’s outlook is clouded by tensions around the world and low inflation
Sterling has gained due to the dollar’s weakness. However, it is still performing in a mixed manner as concerns grow about UK economic policy.
As inflation numbers cool and trade dynamics change, the Bank of England faces increased pressure to adapt its monetary policies.
The UK Consumer Price Index data (CPI), for March, was lower than anticipated. Services inflation rose 4.7% — down from February’s 5.0%.
This moderation fuelled the expectation that BoE might consider a cut in rates at its meeting of May, especially as global economic tensions increase.
The increasing frictions in trade add to the complexity.
Trump’s impositions of reciprocal 10% tariffs, and 25% levies against steel and imported cars have sparked concerns that British exporters may face fiercer competition if displaced products flood into other markets.
Last month, the BoE Financial Policy Committee raised concerns that changes to global trade agreements could undermine financial stability and growth.
BoE policymakers disagree over inflation risk
Megan Greene of the BoE, in a Bloomberg TV interview on Tuesday, said that, while service inflation is still a problem, tariffs will likely have a disinflationary effect.
She said that tariffs are more of an inflationary than a deflationary threat. There is no sign of major labor market tension.
Some market participants are already pricing in the possibility of a cut in rates in the UK. This is especially true as the employer contribution to social security increases and the job postings slow down.
Technical Analysis: The pound sterling holds gains at 1.3400
Investors will be watching closely the S&P Global/CIPS preliminary Purchasing Managers’ Index data (PMI), due this week, and the UK Retail Sales numbers for March.
The BoE will closely monitor both sets of data for any signs of weakness or resilience in the economy that may influence its decision.
According to FXStreet analysts, on technical fronts the GBP/USD continues to display strong bullish movement, as all Exponential Moving averages from short to long term are sloping up.
Source : FXStreet
Analysts said that the 14-day Relative strength Index is now above 70. This indicates overbought market conditions, and raises the likelihood of a short-term correction.
Sterling could still extend its gains to the psychological level at 1.3500, despite the pressure on the dollar and the global markets.
Support will be found around the highs of April 3, 1.3200. This cushion is available in case volatility increases due to unexpected data or political events from Washington.
As traders prepare for increased currency market volatility, the interaction of political rhetoric and monetary policy speculation with global economic indicators continues to influence sentiment.
The path of the GBP/USD may change as new information unfolds.
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