GBP/USD declines to near 1.3600 ahead of BoE rate decision

GBP/USD drifts lower to near 1.3615 in Thursday’s early European session.
The Fed’s Powell described the rate cut as a risk-management measure.
The BoE is expected to keep rates on hold at 4.0% on Thursday.

Lallalit Srijandorn FXStreet

The GBP/USD pair edges lower to around 1.3615 during the early European session on Thursday, pressured by a rebound in the US Dollar (USD). The Bank of England (BoE) interest rate decision will take center stage later on Thursday, with no change in rates expected.

The Federal Reserve (Fed) decided to cut the interest rates by 25 basis points (bps) at its September meeting on Wednesday. This is the Fed's first reduction this year and puts the target range for its main lending rate at 4.0% - 4.25%.

Fed Chair Jerome Powell indicated that Wednesday's move to lower interest rates was a risk management cut and added that he doesn't feel the need to move quickly on rates. This remark provides some support to the Greenback and acts as a headwind for the major pair.

On the GBP’s front, the BoE’s Monetary Policy Committee (MPC) is expected to hold rates at 4% on Thursday. This follows their last meeting in August, where they cut the rate from 4.25% to 4.0%. Financial markets are largely anticipating the UK central bank to leave rates unchanged at 4.0% for the remainder of the year, with a potential reduction only being fully priced in by April 2026.

On Friday, the attention will shift to the UK Retail Sales data for August. The headline Retail Sales is expected to show a rise of 0.4% MoM in August, while Retail Sales ex-Fuel is projected to show an increase of 0.3% during the same period. In case of a better-than-expected outcome, this could lift the Cable in the near term.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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