British Pound ticks up on US Dollar’s weakness, but remains rangebound

GBP/USD has bounced up from lows at 1.3185 but remains within previous ranges below the 1.3300 area.
A softer US Dollar amid lower US Treasury yields has provided some support to US Dollar rivals on Friday.
BoE Governor Andrew Bailey affirmed on Thursday that the bank will have to tighten its monetary policy to bring inflation to target.

Guillermo Alcala FXStreet

The British Pound (GBP) nurses mild gains on Friday, as the US Dollar (USD) rally loses footing amid a moderate pullback on US Treasury yields. The GBP/USD trades around 1.3235, after bouncing from 1.3185 lows on Thursday but remains trapped within the last two weeks’ range, below the resistance area around 1.3300.

The Greenback retreated across the board on Thursday after a successful auction of 30-year US Treasury bonds, which found a 2.51 bid-to-cover ratio, above the average 2.41 ratio of the last six auctions. The positive news sent long-term Treasury yields lower and triggered a risk-on reaction that has undermined speculative demand for the safe-haven US Dollar over the last few sessions.

Fed’s Mussalem feeds hopes of further rate hikes

Oil prices, on the other hand, remain at high levels, with the barrel of Brent Crude trading above $100, and keeping pressure on most of the major central banks to tighten their monetary policies. In this context, St. Louis Fed President Alberto Musalem said earlier on Friday that “more monetary policy will be needed” to bring inflation to the 2% target, which is putting a brake on US Dollar dips.

In the UK, the calendar has been thin this week, but Bank of England (BoE) Governor Andrew Bailey has fed hopes that the bank will not fall behind the rest of the major central banks in the global tightening cycle. Bailey confirmed that inflation risks are rising as high energy prices persist and reiterated that the central bank is "fully committed to returning inflation to target."

Looking ahead, strategists at UOB Group note that “there has been a slight increase in (GDP) downward momentum, but it is insufficient to indicate a sustained decline.” Instead, UOB continues to judge that GBP “could edge lower, but any decline is likely to be part of a lower range of 1.3140/1.3280,” adding that their “view remains unchanged” over the next 1–3 weeks.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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