- GBP/USD gains some positive traction and breaks a five-day losing streak to a multi-week low.
- A modest pullback in the USD lends support to the pair, although a combination of factors limits gains.
- Lower odds of aggressive Fed policy easing limit USD losses and act as a headwind.
The GBP/USD pair attracts some buyers during the Asian session on Tuesday and, for now, appears to have broken a five-day losing streak to a near four-week low, around the 1.3560 area touched the previous day. However, spot prices are struggling to consolidate the rally beyond the 1.3100 level, warranting some caution on the part of bullish traders.
The US Dollar (USD) remains depressed below a seven-week high touched on Friday and turns out to be a key factor lending some support to the GBP/USD pair. That said, reduced bets on another large interest rate cut by the Federal Reserve (Fed), amid signs of a still resilient US labor market, could hold back USD bears at the open aggressive bets. Furthermore, a softer risk tone should act as a tailwind for the safe-haven Dollar and limit the currency pair’s upside.
Investors remain concerned that tensions in the Middle East could escalate into a broader conflict. Furthermore, the not-so-optimistic comments from the National Development and Reform Commission (NDRC) – cast a shadow over recent optimism fueled by China’s stimulus bonanza and temper investors’ appetite for riskier assets. This is evident by a generally weaker tone around equity markets, which could, in turn, drive some safe haven flows into the USD and keep the GBP/USD pair capped.
Meanwhile, Bank of England (BoE) Governor Andrew Bailey said last week there was a chance the central bank could become a little more aggressive in cutting rates if there is more good news on inflation. This could further contribute to capping gains for the British Pound (GBP) and suggests that the path of least resistance for the GBP/USD pair is to the downside. Therefore, any further move higher could continue to be seen as a selling opportunity and risks fading quickly.
Looking ahead, no relevant market-moving economic data is expected to be released on Tuesday, either from the UK or the US, leaving the USD and GBP/USD at the mercy of the Fed’s speeches. Meanwhile, attention remains focused on the release of the FOMC meeting minutes on Wednesday. This will be followed by the US Consumer Price Index (CPI) and Producer Price Index (PPI), which will play a key role in the demand for the USD and provide fresh impetus to the currency pair.
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.
