GBP/USD extends much-needed recovery as Cable recovers 1.31

GBP/USD gained ground on Thursday as the Pound stages a bullish recovery.
The BoE may be much closer to delivering an interest rate cut than previously expected.
General risk sentiment to drive market momentum heading into the end of the week amid a data-light calendar.

Joshua Gibson FXStreet

GBP/USD climbed on Thursday, driven into the high side by over-extended bearish price action that has plagued the pair, as well as a surprisingly close Bank of England (BoE) vote on interest rate moves that gave investors hope that the BoE might be moving to support the UK’s flagging economy despite still-high inflation metrics.

The BoE’s Monetary Policy Committee (MPC) voted to keep interest rates on hold this week, a move that surprised functionally nobody within the investment community. What did come as a surprise was the distance (or lack thereof) between MPC voters voting to hold or cut interest rates. The BoE’s interest rate setting guild voted five-to-four to keep interest rates on hold until the MPC’s next interest rate decision, a notably tighter gap between holders and cutters than initially expected.

Central banks would typically be loathe to trim interest rates at a time when the UK’s national inflation rate has remained stubbornly high, near 3.8% since July. That figure is nearly double the top end BoE’s preferred inflation rate band, however, a lopsided economy and lagging growth metrics may be prompting the BoE to reconsider it’s primary focus.

This Friday would have seen the release of the US’s latest Nonfarm Payrolls (NFP), however, the longest US government shutdown in history has crimped the flow of official datasets. Investors have defaulted to paying additional attention to private data releases despite a tendency to produce volatile results on a release-to-release comparison. University of Michigan Consumer Sentiment and Consumer inflation expectations survey results are still due on Friday, and could take on additional weight for investors who are missing out on meaningful government-level inflation and labor metrics.

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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