GBP/USD advances to multi-year highs above 1.3600 on renewed USD weakness

GBP/USD gathered bullish momentum and rose to its highest level since February 2022.
Disappointing weekly US Jobless Claims data weighs on the USD.
Markets await comments from Federal Reserve policymakers.

Eren Sengezer FXStreet

GBP/USD gained traction in the American session on Thursday and climbed to its highest level since February 2022 above 1.3600. At the time of press, the pair was up 0.4% on the day at 1.3605.

The broad-based selling pressure surrounding the US Dollar (USD) seems to be fuelling GBP/USD's daily rally.

Earlier in the session, the data published by the US Department of Labor showed that the number of first-time applications for unemployment benefits rose to 247,000 in the week ending May 31. This reading came in worse than the market expectation of 235,000 and weighed on the USD.

Additionally, European Central Bank (ECB) President Christine Lagarde's hawkish comments triggered capital outflow out of the USD. After the ECB's decision to cut key rates by 25 basis points, Lagarde noted that they are in a good place and that they might be approaching the end of the current policy cycle.

Reflecting the USD weakness, the USD Index was last seen losing 0.4% on the day at 98.45.

On Friday, the US Bureau of Labor Statistics will publish the May employment report. Ahead of this key release, several Federal Reserve (Fed) policymakers will be delivering speeches in the American session on Thursday. According to the CME FedWatch Tool, markets are currently pricing in about a 30% probability of a 25 bps Fed rate cut in July.

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

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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