- GBP/USD is supported as investors consider UK markets a more attractive investment option.
- The BoE is expected to start lowering interest rates at its August meeting.
- The US dollar is strengthening due to increased risk aversion triggered by the attack on former US President Donald Trump.
GBP/USD is trading around 1.2960 during the Asian session on Tuesday, remaining close to the 13-month high of 1.2995 recorded in the previous session. The British Pound (GBP) could appreciate further as investors consider the UK markets a more attractive investment destination compared to the US markets, which are facing political uncertainties. The decisive victory of Keir Starmer’s Labour Party has ensured stable fiscal policies and smooth ministerial appointments.
Growing uncertainty over the timing of the Bank of England (BoE) rate cuts has been a significant factor in GBP strength. Traders anticipate the BoE to start lowering interest rates at the August meeting.
Traders are assessing upcoming economic data on Wednesday that could impact the Bank of England’s monetary policy stance. The Consumer Price Index (year-on-year) is projected to remain stable at the BoE’s 2% target, with core inflation anticipated to fall to 3.4%. In addition, the Retail Price Index is likely to see a decline, marking the fourth fall in five months.
The US Dollar (USD) strengthened amid rising risk aversion triggered by the assassination attempt on former US President Donald Trump on Saturday. However, slowing US inflation reinforced bets for a Federal Reserve rate cut in September, which could limit the dollar’s upside.
According to the CME Group’s FedWatch tool, markets now indicate an 85.7% probability of a 25 basis point rate cut at the Fed’s September meeting, up from 71.0% a week ago.
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.
