GBP/USD drifts higher above 1.3100, potential upside seems limited

GBP/USD trades with mild gains to around 1.3130 in Monday’s Asian session.
The encourging Nonfarm Payrolls could help limit the USD’s losses.
The dovish stance of the BoE might undermine the Pound Sterling.

Lallalit Srijandorn FXStreet

The GBP/USD pair posts modest gains to near 1.3130, snapping the three-day losing streak during the early Asian session on Monday. However, the upside of the major pair might be limited amid the reduced bets of the Federal Reserve interest rate cuts after the upbeat US Nonfarm Payrolls (NFP) on Friday.

The Fed decided to cut the interest rate by 50 basis points (bps) in September, but stronger-than-expected US NFP data reduced the odds that the larger than “normal” cut will be repeated. According to the CME Fedwatch Tool, financial markets are now pricing in nearly 97.4% chance of 25 basis points (bps) Fed rate cuts in September, up from 31.1% before the NFP data.

The NFP report showed the US economy adding 254K jobs in September versus 159K prior, better than estimations. The Average Hourly Earnings climbed to 4.0% YoY in September from 3.9% in August. Finally, the Unemployment Rate ticks lower to 4.1% in September from 4.2% in August.

The upside of GBP/USD might be capped as the Bank of England (BoE) could take a more aggressive approach to lowering interest rates. BoE Governor Andrew Bailey said last week that the prospect of the BoE becoming a “bit more aggressive” in cutting interest rates as the development on inflation continued to be good. Meanwhile, the BoE Chief Economist Huw Pil stated that the UK central bank should move only gradually by cutting interest rates. Financial markets are more divided about whether the BoE will follow a rate cut in November with another in December. The BoE has not cut rates at consecutive meetings since 2020.

(This story was corrected on October 7 at 06:26 GMT to say that the dovish stance of the BoE might undermine the Pound Sterling, not the US Dollar, and to say that the Average Hourly Earnings climbed to 4.0% YoY, not 3.8%.)

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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