GBP/USD advances toward 1.3150 due to risk-on mood

GBP/USD breaks its three-day losing streak due to improved risk sentiment.
July's US PCE Index data has diminished expectations of an aggressive Fed rate cut in September.
The Pound Sterling may advance further as the BoE is expected to reduce rates gradually in 2024.

Akhtar Faruqui FXStreet

GBP/USD halts its three-day losing streak, trading around 1.3140 during the Asian hours on Monday. The US Dollar (USD) faces challenges due to improved market optimism amid rising dovish expectations surrounding the US Federal Reserve (Fed).

However, July's US Personal Consumption Expenditures (PCE) Index data led traders to scale back expectations of an aggressive Federal Reserve rate cut in September. PCE Price Index increased by 2.5% year-over-year in July, matching the previous reading of 2.5% but falling short of the estimated 2.6%. Meanwhile, the core PCE, rose by 2.6% year-over-year in July, consistent with the prior figure of 2.6% but slightly below the consensus forecast of 2.7%.

According to the CME FedWatch Tool, markets are 70.0% anticipating at least a 25 basis point (bps) rate cut by the Fed at its September meeting. Traders are now likely to focus on the upcoming US employment figures, including the Nonfarm Payrolls (NFP) for August, to gain further insights into the potential size and pace of Fed rate cuts.

On the GBP front, the Bank of England (BoE) is expected to reduce interest rates gradually in the remainder of the year, which might help the Pound Sterling (GBP) hold its position. At the Jackson Hole Symposium, BoE Governor Andrew Bailey stated that the second-round effects of inflationary pressures would be less significant than anticipated. However, Bailey also advised against hastening additional interest rate cuts, according to Reuters.

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, aka ‘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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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