GBP/USD consolidates above mid-1.2900s; remains close to multi-month peak set on Thursday

GBP/USD struggles to gain any meaningful traction on Friday amid mixed fundamental cues.
A modest USD uptick caps the upside, though the divergent Fed-BoE outlook lends support.
Spot prices, meanwhile, remain on track to register modest gains for the third straight week.

Haresh Menghani FXStreet

The GBP/USD pair lacks any firm intraday direction on Friday and oscillates in a narrow trading band, around the 1.2960 area during the Asian session. Spot prices, however, remain close to the highest since early November – levels beyond the 1.3000 psychological mark touched on Thursday – and remain at the mercy of the US Dollar (USD) price dynamics.

The Federal Reserve (Fed) maintained its forecast for two 25 basis points rate cuts in 2025 at the end of March policy meeting on Wednesday and gave a bump higher to its inflation projection. Adding to this, the uncertainty surrounding US President Donald Trump's trade tariffs and escalating geopolitical tensions underpin the safe-haven Greenback and turns out to be a key factor acting as a headwind for the GBP/USD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, looks to build on a modest recovery from a multi-month low touched earlier this week, though any meaningful appreciation still seems elusive. Investors remain worried about a tariff-driven slowdown in the US economic activity, which, in turn, might force the Fed to resume its rate-cutting cycle sooner than expected.

The markets now currently pricing in the possibility that the Fed would lower borrowing costs in June, July, and October. In contrast, the Bank of England (BoE) warns against assumptions for cuts and also increased its forecast for a peak in inflation this year. This suggests that the UK central bank will lower borrowing costs more slowly than other central banks, including the Fed, lending support to the GBP/USD pair.

There isn't any relevant market-moving economic data due for release on Friday, either from the UK or the US. Moreover, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the upside. Hence, any subsequent slide could be seen as a buying opportunity and is likely to remain limited. Nevertheless, spot prices remain on track to end in the green for the third straight week.

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.

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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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