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GBP/USD loses traction near 1.2800 amid modest US Dollar recovery.

  • GBP/USD is trading lower around 1.2805 in early Asian trading on Monday.
  • US Nonfarm Payrolls beat market forecasts in June.
  • The Labour Party won a landslide majority in the UK general election, boosting the GBP.

The GBP/USD pair is trading lower near 1.2805, snapping the seven-day winning streak during the early hours of the Asian session on Monday. The recovery in the Dollar is dragging the pair lower. However, the pair’s downside could be limited amid growing bets that the Federal Reserve (Fed) will cut interest rates in the third quarter.

Friday’s US Nonfarm Payrolls (NFP) beat expectations, adding 206,000 net new jobs in June, according to the US Bureau of Labor Statistics (BLS). The previous month saw a sharp downward revision to 218,000 from the initial reading of 272,000.

Additionally, US Average Hourly Earnings declined to 3.9% on an annual basis in June, compared to the previous reading of 4.1%. The unemployment rate rose to 4.1% for the first time since December 2021. Traders have increased their bets on a Fed rate cut this year as US job growth slowed in June.

The British Pound (GBP) is rising as the Labour Party has secured a landslide victory in the 2024 UK General Election, winning 410 seats and marking a significant increase of 212 seats from the 2019 election. An outright victory for a political party is seen as favourable for its financial markets and bolsters the Cable.

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

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