- GBP/USD is under intense selling pressure in reaction to Bailey’s dovish comments.
- Bailey hints at more aggressive rate cuts and weighs heavily on the Pound amid a bullish Dollar.
- Reduced expectations of a 50 basis point Fed rate cut in November and geopolitical risks benefit the dollar.
The GBP/USD pair continues to lose ground for the third day in a row, also marking the fourth day of a negative move in the last four, and plummets to a more than two-week low during the first half of the European session on Thursday. Spot prices are currently trading below the mid-1.3100 zone, down almost 1.0% on the day, and appear vulnerable to further declines following dovish comments from Bank of England (BoE) Governor Andrew Bailey.
In an interview with The Guardian newspaper published on Thursday, Bailey said there was a chance the BoE could become a little more aggressive in cutting rates if there is more good news on inflation. Markets reacted quickly and are now pricing in a 25 basis point rate cut at the next BoE meeting in November with a 90% probability. This, in turn, weighs heavily on the British Pound (GBP), which, together with the sustained buying of United States Dollars (USD), contributes to the sharp intraday decline of the GBP/USD pair.
Incoming data from the US pointed to a still resilient labor market and forced investors to reduce their expectations of more aggressive easing policy from the Federal Reserve (Fed). This, along with geopolitical risks stemming from ongoing conflicts in the Middle East, helps the safe-haven USD extend this week’s recovery from its lowest level since July 2023. The Dollar Index (DXY), which tracks The dollar against a basket of currencies rises to a three-week high and puts additional pressure on the GBP/USD pair.
With the latest drop, spot prices appear to have confirmed a break below the 61.8% Fibonacci retracement level of the recent rally from the psychological level of 1.3000, or the September monthly low. Furthermore, the oscillators on the daily chart have just started to gain negative traction and suggest that the path of least resistance for the GBP/USD pair is to the downside. Traders are now looking to the US economic docket, which includes weekly jobless claims and the ISM Services PMI, for near-term opportunities.
The British Pound FAQs
The British Pound (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, with 12% of all transactions and an average of $630 billion per day, according to 2022 data.
Its key currency pairs are GBP/USD, also known as “Cable”, which represents 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most important factor influencing the value of the Pound Sterling 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”, that is, a stable inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. This tends to be 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 projects that generate growth.
The published data gauges the health of the economy and may influence the value of the Pound sterling. 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 Pound. Otherwise, if economic data is weak, the pound is likely to fall.
Another significant data for the pound sterling 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 wishing 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.
