- GBP/USD holds firm ahead of the release of PMI data from both nations.
- BoE Governor Andrew Bailey indicated that inflation is currently below the target level mainly due to annual base effects.
- The US Dollar may appreciate due to the prevailing sentiment of nominal rate cuts by the Fed in 2024.
The GBP/USD pair trades around 1.2930 during the Asian session on Thursday, holding close to its 10-week low of 1.2907 reached on Wednesday. Traders are likely to focus on the Purchasing Managers’ Index (PMI) figures from both the United Kingdom (UK) and the United States (US), which are scheduled to be released later in the day.
During a discussion at the Institute of International Finance’s annual membership meeting in Washington, DC, on Wednesday, Bank of England Governor Andrew Bailey stated that inflation is currently below target due to annual base effects. Bailey said the high savings rate indicates caution on the part of consumers and added that pension funds should not be required to make mandatory allocations to UK assets.
The upward movement of the GBP/USD pair may be linked to a slight decline in the US Dollar (USD), influenced by lower US Treasury yields. At the time of writing, US Treasury bond yields are lower. US 2 and 10 years are at 4.06% and 4.22%, respectively. However, the US Dollar Index (DXY), which measures the value of the USD against six major currencies, soared to its highest level since late July, reaching 104.57 on Wednesday.
The US dollar may appreciate further as signs of economic resilience and growing inflation concerns have diminished the likelihood of a significant rate cut by the Federal Reserve in November. According to the CME FedWatch tool, there is an 88.9% probability of a 25 basis point rate cut, with no expectation of a cut larger than 50 basis points.
The British Pound FAQs
The British Pound (GBP) is the oldest currency in the world (AD 886) and the official currency of the United Kingdom. It is the fourth most traded foreign exchange (FX) unit in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/ USD, which represents 11% of FX, GBP/JPY (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 Pound Sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its main objective of “price stability” – a constant 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 will try to control it by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for sterling, as higher interest rates make the UK a more attractive place for global investors to invest their money. When inflation falls too much it is a sign that economic growth is slowing. In this scenario, the Bank of England will consider lowering interest rates to make credit cheaper, so that companies will take on more debt to invest in projects that generate growth.
The data released measures the health of the economy and may affect the value of the pound. Indicators such as GDP, manufacturing and services PMIs and employment can influence the direction of the Pound.
Another important data that is published and affects the British 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 in-demand export products, its currency will benefit exclusively from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa in the case of 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.
