In the currency markets, the Pound Sterling has been on an upward trajectory against the US Dollar. On Wednesday during the European trading session, it climbed close to the 1.2850 mark. This upward movement came as investors grew increasingly concerned that the ongoing US – China trade war could push the United States into a recession.
The trade conflict between the US and China has taken a more aggressive turn. US President Trump decided to raise reciprocal tariffs on Chinese imports to a whopping 104%, in response to China’s retaliatory measures. This decision has not only escalated the trade war but has also stoked fears of a potential US recession.
Adding to the market’s jitters, Deutsche Bank released a prediction that the Bank of England (BoE) might cut interest rates by 50 basis points in May. This expectation further influenced the Pound Sterling’s performance in the market.
The US Dollar, on the other hand, faced selling pressure. The US Dollar Index (DXY), which measures the greenback’s value against six major currencies, tumbled to around 102.00. This decline was a clear indication of the market’s lack of confidence in the US Dollar, especially in the face of growing recession fears.
Trade War Escalation Spurs Recession Worries in the US
The US – China trade war reached a new high when President Donald Trump signed an order on Tuesday to hike tariffs on China to 104%. This move came after Beijing retaliated against his previous reciprocal tariffs. Trump also accused China of currency manipulation, claiming that China was using it to counter the effects of the increased duties.
Last week, China had increased the levy on US imports by 34% as a response to the tariffs imposed by Trump on Liberation Day. This back – and – forth of tariff hikes has created a highly uncertain environment in the global trade landscape, with the US economy bearing the brunt of the potential fallout.
Fed’s Dovish Bets and Economic Data Focus
The increasing likelihood of a US recession has led to a shift in expectations regarding the Federal Reserve’s (Fed) monetary policy. According to the CME FedWatch tool, the probability of the Fed cutting interest rates in May has skyrocketed from 10.6% a week ago to 52.5%.
Investors are now eagerly awaiting the release of the Federal Open Market Committee (FOMC) minutes from the March policy meeting, scheduled to be published at 19:00 GMT. In that meeting, the Fed had kept interest rates steady within the 4.25% – 4.50% range, and officials had signaled two potential interest rate cuts for the year. These minutes could provide valuable insights into the Fed’s future policy decisions.
This week, the US Consumer Price Index (CPI) data for March, set to be released on Thursday, is also in the spotlight. The CPI is a crucial indicator of inflation, and its reading could significantly impact market expectations regarding future interest rate changes.
Pound Sterling’s Volatile Performance Amid Global Uncertainty
On Wednesday, the Pound Sterling’s performance against its major currency peers was rather volatile. The protectionist policies of US President Trump have not only raised the specter of a US recession but also increased the risk of a global economic slowdown. Analysts at JPMorgan warned that the rapid escalation of US tariffs on China could be severe enough to tip the global economy into a recession.
China, being the world’s manufacturing hub due to its low – cost labor and supportive government policies, is at the center of this trade turmoil. Financial market participants are worried that if the trade war with the US continues to worsen, Chinese companies may seek alternative markets for their products. This could pose a problem for Europe, as it may struggle to compete with China in a price war.
In the UK, traders have started to anticipate a more dovish stance from the Bank of England. Deutsche Bank analysts believe that the BoE might take a more “forceful” approach to address the current economic situation. They expect the central bank to cut interest rates by 50 basis points in the May policy meeting. The BoE’s decision is likely influenced by factors such as a significant decline in survey activity indicators, an unwarranted tightening of financial conditions, and concerns about a slowdown in the labor market.
This week, investors will also be closely watching the UK’s monthly Gross Domestic Product (GDP) and factory data for February, which will be released on Friday. After contracting in January, the UK economy is expected to have grown by 0.1%.
Technical Analysis: Pound Sterling’s Battle at Key Levels
Looking at the technical aspects of the GBP/USD pair, on Wednesday, the Pound Sterling managed to rise above the 1.2800 mark. However, it faced resistance in reclaiming the 20 – day Exponential Moving Average (EMA), which was trading around 1.2877.
The 14 – day Relative Strength Index (RSI) had initially fallen close to 40.00 but then rebounded. If the RSI fails to hold above the 40.00 level, it could potentially trigger a new wave of bearish momentum for the GBP/USD pair.
On the downside, the 38.2% Fibonacci retracement level, calculated from the late – September high to the mid – January low and located near 1.2610, is considered a key support zone for the pair. On the upside, the psychological level of 1.3000 serves as a significant resistance zone.
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