British Pound picks up above 1.3200 with the YTD lows of 1.3140 close by
- GBP/USD rises above 1.3200 from YTD lows at 1.3140 but maintains its broader bearish trend in play.
- Lower Oil prices and a softer US Dollar have provided some support to the Pound.
- Investors remain wary of placing large GBP longs amid UK's political impasse.
The British Pound (GBP) is trading higher against the US Dollar (USD) for the second consecutive day on Friday, as the US Dollar’s rally faltered, with Oil prices returning to pre-war levels. The GBP/USD pair has returned to levels above 1.3200, turning positive in the weekly chart, but the broader bearish trend remains in play.
Market sentiment has improved somewhat as Crude prices declined to levels before the US-Israel attack on Iran on February 28, which has undermined demand for the safe-haven US Dollar and provided some relief to riskier assets like the Sterling.
US Dollar weakness, however, is likely to be short-lived. The revival of the “US exceptionalism” theory, fuelled by a sequence of solid macroeconomic data and massive investment inflows driven by the AI boom, is likely to keep buoying the Greenback, unless the scenario changes radically.
Fed tightening hopes likely to cushion USD dips
Beyond that, inflation remains well above target, as the recent decline in Oil prices has not yet been transmitted to the broader economy. US Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s inflation gauge of choice, accelerated to a 4.1% year-on-year growth in May, its highest level in three years, endorsing investors' bets of upcoming rate hikes and providing support to the US Dollar.
In the UK, the political impasse is keeping investors in a wait-and-see mode and Sterling's upside attempts in check. The immediate positive impact of Prime Minister Keir Starmer’s resignation on Monday turned into caution later in the week. Markets seem to have given Andrew Burnham, the most likely candidate to replace Starmer, the benefit of the doubt, but are waiting for more clarity about his policies before placing large directional bets on the cable.
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.
