- GBP/USD is trading stable around 1.3110 in early European trading on Wednesday.
- The US ISM manufacturing PMI was weaker than expected in August.
- Investors expect the BoE to leave interest rates unchanged in September.
The GBP/USD pair remains flat near 1.3110 during the early part of the European session on Wednesday. However, the risk-off sentiment ahead of key US events could provide some support to the US Dollar (USD) and drag the major pair lower. US JOLTS job openings and the Fed Beige Book are due out later on Wednesday.
Data released by the Institute for Supply Management (ISM) on Tuesday revealed that the manufacturing PMI rose slightly to 47.2 in August from 46.8 in July. This figure was below the market consensus of 47.5.
According to the CME FedWatch tool, which acts as a barometer of market expectations about the federal funds target rate, the probability of the Federal Reserve (Fed) cutting rates by 25 basis points (bps) at its September meeting is 61%, while the odds of the Fed cutting rates by 50 bps are 39%.
Fed Chair Jerome Powell said last month that “the time has come” to tighten monetary policy, noting that the US central bank is likely to start easing monetary policy at its next scheduled meeting on September 17-18. Firmer bets on a Fed rate cut could weigh on the USD in the near term.
US jobs data for August will be in focus on Friday. Deutsche Bank economists suggested that a rise in the unemployment rate could reinforce market expectations of a 50bp rate cut by the Fed.
On the other hand, the cautious mood continues to support the US Dollar for the time being, although the Bank of England (BoE) is expected to follow a shallow rate-cutting cycle this year compared to its peers. GBP/USD will likely be influenced by the USD price dynamics, given that there are no top-tier economic data releases in the UK.
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.
