GBP/USD: BoE has tough act to follow after Fed cuts rates

GBP/USD briefly touched 11-week highs before a sharp drag back into the low side.
The Fed delivered a broadly-expected interest rate cut on Wednesday, but policy tone remains apprehensive.
The BoE now has to follow up its larger cousin with what is expected to be a more measured rate approach.

Joshua Gibson FXStreet

GBP/USD surged into its highest bids in eleven weeks on Wednesday, bolstered by a spat of broad-market Greenback weakness after the Federal Reserve (Fed) delivered its first interest rate cut of the year, and the dot plot shifted lower to incorporate more rate cuts in the future than the previous Fed meeting.

The Fed's Summary of Economic Projections (SEP)indicated that Fed policymakers foresee more rate adjustments in the near future. The dot plot suggests that most policymakers anticipate interest rates will reach about 3.5-3.75% by the end of the year, with the possibility of two more rate cuts through December.

However, a cautionary appearance from Fed Chair Jerome Powell sharply reversed risk flows after he reminded markets that Fed rate cuts aren't on a predetermined path, and can only continue if the economic data supports it.

The Bank of England (BoE) is set to deliver its own interest rate decision on Thursday. The BoE has big shoes to fill after the Fed took center stage this week, and the BoE’s Monetary Policy Committee (MPC) is widely expected to vote 7-to-2 in favor of keeping rates on hold for the time being.

GBP/USD daily chart

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

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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