GBP/USD consolidates above mid-1.3400s; bullish potential seems intact

GBP/USD struggles to gain any meaningful traction during the Asian session on Thursday.
A weaker risk tone assists the USD to preserves its weekly gains and weighs on the major.
The divergent Fed-BoE policy expectations act as a tailwind for spot prices and limit losses.

Haresh Menghani FXStreet

The GBP/USD pair is seen consolidating its heavy losses registered over the past two days and oscillating in a narrow trading band, just above mid-1.3400s during the Asian session on Thursday. However, the fundamental backdrop warrants some caution for bearish traders and before positioning for an extension of the retracement slide from the 1.3565-1.3570 region, or the highest level since September 18, touched on Tuesday.

A slight deterioration in the global risk sentiment offsets Wednesday's mixed US economic releases and assists the safe-haven US Dollar (USD) to preserve its weekly gains, which, in turn, caps the GBP/USD pair. In fact, the Institute for Supply Management reported that the business activity in the US services sector unexpectedly picked up in December and its Non-Manufacturing Purchasing Managers' Index (PMI) increased to 54.4 from 52.6 in November. Separately, the ADP's national employment report showed that private payrolls rebounded less than expected in December.

Adding to this, the latest Job Openings and Labor Turnover Survey (JOLTS) revealed that US job openings fell more than expected in November, suggesting that demand for labor continued to ebb. The data reaffirms market expectations for more interest rate cuts by the US Federal Reserve (Fed), which might keep a lid on any further USD appreciation. Furthermore, the Bank of England (BoE) less dovish message, suggesting that rates are getting closer to neutral, might continue to act as a tailwind for the British Pound (GBP) and help limit the downside for the GBP/USD pair.

Moving ahead, there isn't any relevant market-moving economic data due for release from the UK on Thursday, leaving spot prices at the mercy of the USD price dynamics. Later during the North American session, traders will look to the US Weekly Initial Jobless Claims for some impetus. The focus, however, will remain glued to the US Nonfarm Payrolls (NFP) report on Friday, which will influence expectations about the Fed's future rate-cut path. This, in turn, will drive the USD demand in the near-term and determine the next leg of a directional move for 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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