GBP/USD extends upside above 1.3500 on risk-on sentiment

GBP/USD gains momentum to around 1.3525 in Wednesday’s early European session.
Uncertainty over tariff policy and concerns over the Fed independence could undermine the US Dollar.
Growing UK fiscal pressures and rising BoE rate cut bets might cap the pair’s upside.

Lallalit Srijandorn FXStreet

The GBP/USD pair extends the rally to near 1.3525 during the early European session on Wednesday. The risk-on mood provides some support to the riskier currency, like the Pound Sterling (GBP). Investors will keep an eye on the preliminary reading of UK Purchasing Managers Index (PMI) reports, which are due later on Thursday.

Uncertainty over tariff policy and concerns over the Federal Reserve (Fed) independence might weigh on the Greenback and create a taiwind for the pair. Investors brace for Trump’s tariffs on top trading partners to take effect next month on one hand and bet that Trump will postpone them yet again on the other. Meanwhile, US Treasury Secretary Scott Bessent said earlier this week that the administration is more concerned with the quality of trade agreements than the timing.

Furthermore, worries about Fed independence could dampen the market sentiment, as Trump has repeatedly railed against Fed Chair Jerome Powell and urged him to resign because of the US central bank's reluctance to cut interest rates. Fed Vice Chair Michelle Bowman on Tuesday said the Fed's ability to set monetary policy without political interference is "very important.

On the other hand, persistent UK political and fiscal risks, along with a cooling labor market, might undermine the GBP against the USD. Analysts expected the Bank of England (BoE) to deliver two interest rate reductions by the end of the year, which would take the bank rate down to 3.75%.

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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