British Pound extends losses nearing 1.3400 as markets await Burnham’s policies
- GBP/USD trades lower fr the fourth consecutive day and approaches 1.3400.
- Investors await clarity about PM Burnham's policies to make GBP investment decisions.
- The US Dollar remains stalled as markets cling to hopes of a new round of US-Iran negotiations.
The British Pound (GBP) is one of the weakest performers among major currencies, extending its reversal against the US Dollar for the fourth consecutive week. The GBP/USD pair is drifting closer to the 1.3400 level heading into the US trading session on Tuesday, as investors ponder UK Prime Minister Burnham's promises and the profiles of his cabinet's members.
Burnham reiterated his commitment to respect the fiscal rules set by the previous chancellor, Rachel Reeves. The new Prime Minister, however, raised some eyebrows by claiming some flexibility to fulfil his commitments to alleviate Britons’ cost of living, and sent shivers through most Pound crosses.
UK Unemployment remained steady in May
On the macroeconomic front, UK ILO Unemployment data beat expectations, as the jobless rate remained steady at 4.9% in the three months before May, against expectations of an uptick to 5%. Wages, however, have moderated beyond expectations, hinting at softer inflationary pressures, and offsetting the positive impact of the steady Unemployment Rate.
The US Dollar, on the other hand, came under moderate bearish pressure over the last sessions, as investors cling to hopes that diplomatic efforts work their way to de-escalate tensions in the Gulf. Axios reported that the US administration is considering a peace proposal submitted by mediators, and AP affirmed that Iranian officials are meeting with mediators in Pakistan
Dollar dips, however, remain shallow so far, as risks that Iran's conflict might escalate to a full-blown war are keeping traders cautious. Attacks on vessels attempting to cross the Strait of Hormuz keep Oil prices buoyed, and the Iran-backed Houthis have announced the closure of the Red Sea gate to Saudi Arabian vessels, adding concerns about a shortage of Crude supplies.
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.
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.
