British Pound weakens below 1.3250 as UK Prime Minister Keir Starmer resigns

GBP/USD remains weak around 1.3245 in Tuesday’s early Asian session.
UK PM Keir Starmer resigned, signaling a period of political uncertainty.
Fed holds interest rates steady but leaves the door open to a hike.

Lallalit Srijandorn FXStreet

The GBP/USD pair loses ground to near 1.3245 during the early Asian trading hours on Tuesday. Political uncertainty in the United Kingdom (UK) continues to weigh on the British Pound (GBP) against the US Dollar (USD). The preliminary readings of the S&P Global Purchasing Managers Index (PMI) from both the US and the UK are due later on Tuesday.

The UK has been plunged into yet another political crisis as Prime Minister Keir Starmer resigned on Monday under intense pressure following Andy Burnham's victory in the Makerfield by-election last week. His Labour Party will now need to select a new leader to lead the country.

“Markets will be focused on Burnham’s views on fiscal policy and whether there will be any relaxation of the current fiscal rules,” said

Commonwealth Bank of Australia strategists, including Kristina Clifton. “A loosening in fiscal rules would likely be poorly received by the UK bond market,” and weigh on the pound, they said.

Markets anticipate the US rate hike later this year after new US Federal Reserve (Fed) Chair Kevin Warsh adopted a hawkish tone on inflation during his first policy meeting. This, in turn, might support the Greenback and act as a headwind for the major pair.

Markets have priced in nearly an 89% chance of a Fed hike in December, up from 61% before last week’s FOMC meeting, according to the CME FedWatch tool.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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