- GBP/USD loses ground following BoE’s decision to cut rates by 25 basis points.
- BoE Governor Andrew Bailey noted that the overall path of inflation is closer to the 2% target compared with the median forecast.
- The recent US PMI data has created a complex situation, highlighting an economic slowdown and increased likelihood of a Fed rate cut.
GBP/USD extends losses following the Bank of England’s (BoE) decision to deliver a widely expected 25 basis point rate cut at its August meeting on Thursday. The GBP/USD pair is trading around 1.2720 during the Asian session on Friday.
BoE Governor Andrew Bailey explained the decision to cut the policy rate to 5% and answered questions from the media. Bailey noted that the minimum wage increase has not been detrimental in his view. According to Bailey, although businesses often cite higher minimum wages as a compression of pay scales, the overall path of inflation, including upside risks, is now closer to the 2% target compared to the median forecast.
The US Dollar (USD) could advance against its peers due to rising risk aversion. Recent manufacturing and labor market data have created a complex situation involving an economic slowdown in the United States (US) and increased expectations of a rate cut by the Federal Reserve. If the economic slowdown becomes too severe, it could negatively impact market sentiment, rendering any rate cuts by the Fed irrelevant.
The US ISM Manufacturing Purchasing Managers’ Index (PMI) fell to an eight-month low of 46.8 in July, compared with the previous reading of 48.5 and a forecast for an increase to 48.8. US Initial Claims for Jobless Benefits for the week ended July 26 rose to 249K from 235K in the previous week, beating the forecast for an increase to 236K.
The CME FedWatch tool shows that traders fully anticipate a 25 basis point rate cut on September 18. Traders are likely to closely monitor upcoming US Nonfarm Payrolls and Average Hourly Earnings data for July, due later in the American session, for insights into the US labor market.
The British Pound FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency unit in the world, accounting for 12% of all transactions and an average of $630 billion a day, as of 2022.
Its key currency pairs are GBP/USD, also known as the “Cable,” which accounts for 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The British Pound is issued by the Bank of England (BoE).
The most important factor influencing the value of the British Pound is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on achieving its main objective of “price stability”, i.e. a stable inflation rate of around 2%. Its main tool for achieving this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, making credit more expensive for individuals and businesses. This is generally positive for the GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation is too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to make credit cheaper, so that companies borrow more to invest in growth-generating projects.
The data released gauges the health of the economy and can influence the value of the Pound. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the Pound.
A strong economy is good for the British Pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the British Pound. Conversely, if economic data is weak, the British Pound is likely to fall.
Another significant indicator for the pound is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
