British Pound hovers near six-month highs with investors awaiting key US events

GBP/USD flatlines around 1.3630, at a short distance from six-month highs at 1.3675.
FX volatility remains low with investors awaiting US PCE inflation and the Jackson Hole meeting.
TD Securities' analysts affirm that USD positioning has flipped from long to short.

Guillermo Alcala FXStreet

The British Pound (GBP) remains practically flat for the second consecutive day against the US Dollar (USD), with markets on a “wait-and-see” stance, awaiting key US Inflation data on Wednesday and the Jackson Hole central bankers’ summit on Friday. The GBP/USD pair flatlines around 1.3630 with the six-month highs of 1.3675 reached last week still in the bulls’ target.

FX volatility is unusually low, in the absence of key macroeconomic releases, ahead of August’s US Personal Consumption Expenditures (PCE) Price Index figures, the US Federal Reserve’s (Fed) favourite inflation gauge. The market consensus points to sticky inflationary pressures, which would give further reasons for Fed hawks to call for monetary tightening.

USD Positioning has flipped to short

The highlight of the week, however, will be the Jackson Hole Symposium, and specifically Fed Chairman Kevin Warsh’s speech, with investors eager for clues about the bank’s near-term monetary policy path, as doubts about the central bank's independence reemerge.

According to TD Securities' analysts, "USD positioning has just flipped from long to short and has more room to grow." They argue that "broad USD downtrends remain intact except in select pairs such as USDCAD," underscoring that the latest move is not confined to a narrow set of crosses.

Looking ahead, Strategists at UOB Group see room for further GBP appreciation in the next one to three weeks. The bank “turned positive on GBP last Monday (17 Aug, spot at 1.3540)” and they assess that the GBP/USD pair “could continue to rise to 1.3700 (unless) GBP breaks below 1.3585.”

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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