Pound Sterling extends gains against US Dollar as hit from US debt downgrade lingers

• The Pound Sterling moves further up to near 1.3380 against the US Dollar as Moody’s downgraded the US sovereign debt and fresh concerns over US-China trade emerge.
• China accused the US of undermining the recent trade talks after Washington warned about using Huawei AI chips across the world.
• The UK secures a “reset” agreement with the EU after signing trade deals with India and the US.

The Pound Sterling (GBP) rises to near 1.3380 against the US Dollar (USD) during European trading hours on Tuesday. The GBP/USD pair gains for a second consecutive day as the US Dollar continues to suffer due to a one-notch downgrade in the United States (US) sovereign credit by Moody’s Rating. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, weakens near the weekly low slightly above 100.00.

On Friday, Moody’s downgraded the US long-term issuer and senior unsecured ratings from Aaa to Aa1 over the growing $36 trillion US government debt pile. The move prompted fears about investing in US assets and boosted US bond yields substantially. The initial reaction from 10-year US Treasury yields after the rating downgrade was strong, posting a fresh over-a-month high of around 4.56%. After the initial shock, yields have fallen back to near 4.45%.

Another reason behind the US Dollar remaining on the back foot is China accusing the US of undermining high-level trade talks in Geneva last weekend. The accusation from Beijing at Washington came after comments from the US Commerce Department last week that discouraged the use of Huawei Technologies Co.’s artificial-intelligence (AI) chips and Chinese AI models. According to a Chinese Commerce Ministry spokesperson, the US Commerce Department's advice is "discriminatory" and "market distorting," prompting Beijing to "demand" that the administration "correct its mistakes.”

A report from Bloomberg showed last week that the Commerce Department said that it was issuing guidance to make clear the “use of Huawei Ascend chips is a breach of the US government’s export controls”. The agency also warned the public about “the potential consequences of allowing US AI chips to be used for training and inference of Chinese AI models.”

Meanwhile, investors look for fresh cues about how much the Federal Reserve (Fed) will cut interest rates this year. A slew of Fed officials has urged patience as they need more data to assess the economic outlook in the wake of significant economic policy changes. On Monday, Atlanta Fed Bank President Raphael Bostic stated that inflation will now take longer to return to the 2% and anticipated one interest rate cut this year.

Daily digest market movers: Pound Sterling outperforms as UK-EU secure “reset” agreement

• The Pound Sterling trades higher against its peers, except the Japanese Yen (JPY), on Tuesday. The British currency gains as the United Kingdom (UK) signs an agreement with the European Union (EU) on trade, defense, and security that deepens its ties with the continent after Brexit. This is the third bilateral deal by the UK after closing two with India and the United States (US) this month.
• The major highlights of the deal between the UK and the EU are the Sanitary and Phytosanitary (SPS) deal that aims to withdraw routine checks on products from animals and plants, Britain’s participation in the Eurozone’s historic defense spending, and investment of £360 million in the fishing industry.
• Strong ties between the EU and the UK at a time of potential global economic turmoil due to the fallout of reciprocal tariffs by US President Donald Trump are favorable for both economies.
• On the domestic front, investors await the UK Consumer Price Index (CPI) data for April, which will be released on Wednesday. As measured by the CPI, the core inflation – which excludes volatile components of food, energy, alcohol, and tobacco – is expected to have grown at a faster pace of 3.7%, compared to 3.4% in March. The headline CPI is estimated to have risen at a robust pace of 3.3% against the prior release of 2.6%.
• Data showing accelerating price pressures would force traders to pare bets supporting further interest-rate cuts by the Bank of England (BoE). At the start of the month, the BoE cut key borrowing rates by 25 basis points (bps) to 4.25%, with a 7-2 vote split and guided a “gradual and cautious” interest rate cut approach. Two out of seven Monetary Policy Committee (MPC) members, Swati Dhingra and Alan Taylor, voted for a bigger interest rate reduction by 50 bps. On Monday, Dhingra clarified that she favored a larger-than-usual rate cut to show where the economy is heading. "I get to pick times when I want to be able to make a more categorical statement about where I think the economy is headed," Dhingra said in a podcast interview to the Financial Times (FT), Reuters reported. 

Technical Analysis: Pound Sterling demonstrates strength around 1.3400

The Pound Sterling trades firmly around 1.3380 against the US Dollar on Tuesday. The GBP/USD pair holds above the 20-day Exponential Moving Average (EMA), which trades around 1.3280, suggesting that the near-term trend is bullish.

The 14-day Relative Strength Index (RSI) points in the upper boundary of the 40.00-60.00 range. A fresh bullish momentum would appear if the RSI breaks above 60.00.

On the upside, the three-year high of 1.3445 will be a key hurdle for the pair. Looking down, the psychological level of 1.3000 will act as a major support area.