GBP/USD advances beyond mid-1.3500s, fresh high since February 2022

GBP/USD kicks off the new week on a positive note and climbs to a fresh multi-year top.
Bets that the BoE will cut rates at a slower pace underpin the GBP and support the pair.
US fiscal concerns and dovish Fed expectations weigh on the USD and benefit spot prices.

Haresh Menghani FXStreet

The GBP/USD pair is seen building on last week's strong move up and gaining some follow-through positive traction during the Asian session on Monday. The momentum lifts spot prices beyond the 1.3550 level, to the highest level since February 2022, and is sponsored by a combination of factors.

The British Pound (GBP) continues with its relative outperformance on the back of the upbeat UK Retail Sales figures released on Friday, which suggest that consumer spending remains a bright spot despite a gloomy economic outlook. This, along with higher-than-expected inflation in April, fueled speculations that the Bank of England (BoE) would pause at its next meeting on June 18 and take its time before lowering borrowing costs further.

The US Dollar (USD), on the other hand, continues with its struggle to attract any meaningful buyers amid worries that the tax and spending bill will worsen the US budget deficit at a faster pace than previously expected. Adding to this, the growing acceptance that the Federal Reserve (Fed) will cut interest rates further in 2025 drag the USD to a nearly one-month low and further contributes to the GBP/USD pair's positive move.

Moving ahead, investors this week will confront the release of important US macro releases – starting with Durable Goods Orders on Tuesday, followed by the Prelim GDP print on Thursday. This, along with FOMC meeting minutes on Wednesday and the US Personal Consumption Expenditure (PCE) Price Index on Friday, might provide cues about the Fed's rate-cut path, which will influence the USD and the GBP/USD pair.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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