GBP/USD extends upside above 1.2650, eyes on US data/FOMC Minutes

GBP/USD extends the rally near 1.2688 on the weaker US dollar in Wednesday’s early Asian session.
Fed Chair Powell saw progress on inflation but needed more confidence before cutting rate.
Financial markets expect a rate cut from the BoE on August 1.

Lallalit Srijandorn FXStreet

The GBP/USD pair trades in positive territory for the fifth consecutive day around 1.2688 on Wednesday during the early Asian session. The USD Index (DXY) declines below the 106.00 hurdle, which supports the major pair. Investors await the US June ADP Employment Change, ISM Services PMI, along with the FOMC Minutes, which are due later on Wednesday.

On Tuesday, US Federal Reserve Chair Jerome Powell stated that US inflation is cooling again after higher readings earlier this year. Still, he wants to see more evidence before being confident enough to start cutting interest rates. Powell added that the US economy and job market remain strong, which means the central bank can take its time in deciding when rate cuts are appropriate.

Meanwhile, Chicago Fed President Austan Goolsbee said that he sees some "warning signs" of economic weakness, adding that the Fed's goal is to bring inflation down without pressuring the labour market. Traders raise their bets on the Fed easing cycle this year, seeing nearly 63% odds for a 25 basis points (bps) rate cut in September, up from 58% on Monday, according to the CME FedWatch tool. This, in turn, exerts some selling pressure on the Greenback.

On the other hand, the Pound Sterling (GBP) edges higher against the USD despite expectations of early rate cuts by the Bank of England (BoE). Currently, investors anticipate the UK central bank to start cutting interest rates at its upcoming meeting in August. “The MPC is following the data. The data is clearly moving in the right direction, and therefore, rate cuts will have to follow,” said Michael Field, European market strategist at Morningstar.

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, aka ‘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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