The GBP/USD pair struggles to capitalize on Friday’s strong move up and opens with a bearish gap at the start of a new week amid a broadly firmer US Dollar (USD). Spot prices, however, lack follow-through selling and seem to have stabilized below mid-1.3400s, still down over 0.30% for the day.
Japan’s ruling Liberal Democratic Party (LDP) elected Sanae Takaichi as its new leader over the weekend. Given that Takaichi is viewed as fiscally dovish, the outcome raises the chance that the Bank of Japan (BoJ) could delay raising interest rates further and trigger massive selling around the Japanese Yen (JPY). This, in turn, provides a goodish lift to the USD, which turns out to be a key factor weighing on the GBP/USD pair.
The upside for the Greenback, however, seems limited in the wake of the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year. Apart from this, concerns that a prolonged US government shutdown could negatively impact the US economic performance, along with the risk-on mood, might keep a lid on the safe-haven USD. This, in turn, could offer support to the GBP/USD pair.
Meanwhile, money markets are betting the Bank of England (BoE) will keep interest rates on hold for the rest of this year amid signs of faster inflation and a more resilient economy. This could benefit the British Pound (GBP) and further limit losses for the GBP/USD pair, making it prudent to wait for some follow-through selling before confirming that the recent bounce from the lowest level since August touched earlier this month has run out of steam.
Traders now look forward to the release of the UK Construction PMI for a fresh impetus. The focus, however, will remain glued to the BoE Governor Andrew Bailey’s speech later during the North American session, which will play a key role in influencing the GBP price dynamics and producing some meaningful trading opportunities around the GBP/USD pair.
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.
