- GBP/USD depreciates as the US Dollar gains ground due to evolving monetary policy signals by Fed officials.
- Fed’s Goolsbee does not support the view that the Fed should cut interest rates to reduce the cost of government debt.
- The FPC committee stated that there remains a high risk of sharp declines in risky asset prices.
GBP/USD continues its losing streak for the sixth consecutive day, trading around 1.3560 during the Asian hours on Friday. The pair depreciates as the US Dollar (USD) extends its gains due to evolving monetary policy signals by the Federal Reserve’s (Fed) officials. Traders are likely watching May’s Gross Domestic Product (GDP) data from United Kingdom (UK) due later in the day.
Federal Reserve Bank of Chicago President Austan Goolsbee said late Thursday that he does not support the arguments that the US central bank should cut rates to make government debt cheaper, the mandate is on jobs and prices.
The Federal Open Market Committee (FOMC) Minutes from the June 17–18 meeting, released on Wednesday, indicated that policymakers largely maintained a wait-and-see stance regarding future interest rate decisions.
However, the downside of the GBP/USD pair could be limited as the US Dollar may lose its ground due to the introduction of new tariff actions by US President Donald Trump. President Trump announced on Thursday a 35% tariff rate for goods imported from Canada, effective August 1. He further stated that the European Union (EU) would receive a letter notifying them of new tariff rates “today or tomorrow.”
The GBP/USD pair also faces challenges as the Pound Sterling (GBP) loses ground due to rising economic concerns in the United Kingdom (UK). The Bank of England (BoE) warned of multiple risks in its mid-year Financial Policy Committee (FPC) report on Wednesday.
FPC committee said, “The risk of sharp falls in risky asset prices, abrupt shifts in asset allocation, and a more prolonged breakdown in historical correlations remains high.” The committee highlighted geopolitical tensions, global fragmentation of trade and financial markets, and pressures on sovereign debt as responsible for escalating economic risks in the UK.
Pound Sterling 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 unit for foreign exchange (FX) 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, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release 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 over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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