- GBP/USD finds support from a combination of factors, although it lacks bullish conviction.
- Expectations of a slower rate-cutting cycle by the BoE continue to support the Pound.
- Bets on a bigger Fed rate cut in September weigh on the USD and offer further support.
The GBP/USD pair is trading with a positive bias around the 1.3100 zone in the mid-Asian session on Thursday, although it lacks strong follow-through buying and remains below the weekly high touched the previous day.
The British Pound (GBP) remains supported by expectations that the Bank of England (BoE) rate-cutting cycle will be slower than in the Eurozone or the US. Bets were boosted by a survey by the British Retail Consortium, which showed that spending in August rose 1.0% year-on-year, marking the biggest rebound since March. This, coupled with a softer US Dollar (USD), turns out to be a key factor acting as a tailwind for the GBP/USD pair.
The Job Openings and Labor Turnover Survey (JOLTS) released on Wednesday showed that job openings fell to 7.673 million in July, the lowest level since January 2021. Moreover, dovish comments from Fed officials raised bets for a larger rate cut at the upcoming FOMC policy meeting on September 17-18 and dragged US Treasury yields to their lowest level in over a year. This, in turn, keeps USD bulls on the defensive and offers some support to the GBP/USD pair.
That said, the market’s cautious stance is helping limit the safe-haven US Dollar’s downside. Traders also seem reluctant to open aggressive directional positions ahead of the crucial US monthly employment data, popularly known as the Non-Farm Payrolls (NFP) report on Friday. This, in turn, seems to limit the upside of the GBP/USD pair. Nevertheless, the fundamental backdrop seems to tilt in favour of the bulls and suggests that the path of least resistance for spot prices is to the upside.
Looking ahead to key data risk, investors on Thursday will take cues from the US economic calendar, which includes the ADP private sector employment report, the usual weekly initial jobless claims and the ISM services PMI. This, along with US bond yields and broader risk sentiment, could boost demand for the USD and create short-term trading opportunities around the GBP/USD pair later during the early North American session.
BoE FAQs
The Bank of England (BoE) decides the monetary policy of the United Kingdom. Its main objective is to achieve price stability, i.e. a constant inflation rate of 2%. Its instrument for achieving this is the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and at which banks lend to each other, determining the level of interest rates in the wider economy. This also influences the value of the British Pound (GBP).
When inflation exceeds the Bank of England’s target, the Bank of England responds by raising interest rates, making it more expensive for citizens and businesses to access credit. This is positive for the British Pound, as higher interest rates make the UK a more attractive place for global investors to invest their money. When inflation falls below target, it is a sign that economic growth is slowing, and the Bank of England will consider lowering interest rates to make credit cheaper in the hope that businesses will borrow to invest in growth-generating projects, which is negative for the British Pound.
In extreme situations, the Bank of England may implement a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit into a jammed financial system. QE is a policy of last resort when lowering interest rates fails to achieve the required result. The process of QE involves the Bank of England printing money to buy assets, usually AAA-rated government or corporate bonds, from banks and other financial institutions. QE often results in a weakening of the British Pound.
Quantitative tightening (QT) is the reverse of QE, and is applied when the economy is strengthening and inflation is starting to rise. Whereas in QE the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage them to lend, in QT the BoE stops buying more bonds and stops reinvesting the maturing principal of bonds it already holds. This is generally positive for the British Pound.
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.
