GBP/USD falls toward 1.3500 amid uncertain Fed policy outlook

GBP/USD loses ground as the US Dollar recovers on uncertainty surrounding the Fed rate cut decision.
Traders await the US Nonfarm Payrolls for August to gain fresh impetus on the Fed decision in September.
The UK Treasury Committee’s questioning of BoE policymakers may provide fresh insights into the future policy outlook.

Akhtar Faruqui FXStreet

GBP/USD retraces its recent gains from the previous session, trading around 1.3520 during the Asian hours on Tuesday. The pair depreciates as the US Dollar (USD) gains ground, driven by persistent inflationary pressures in the United States (US), which heightened uncertainty over potential Federal Reserve (Fed) rate cuts. Traders will likely observe the August ISM Manufacturing Purchasing Managers Index (PMI) later in the day.

Furthermore, traders will also observe upcoming labor market data this week that could shape the US Federal Reserve’s (Fed) policy decision in September. Key reports include ADP Employment Change, Average Hourly Earnings, and Nonfarm Payrolls for August.

However, the downside of the GBP/USD pair could be limited as the US Dollar (USD) may struggle amid the increasing likelihood of a US Federal Reserve (Fed) rate cut in the September meeting. The CME FedWatch tool suggests a pricing in more than 89% of a 25 basis points (bps) rate cut by the Fed at the September policy meeting, up from an 84% chance a week ago.

Traders assess the timing of the Autumn Budget as the United Kingdom (UK) Parliament returns from summer recess. Treasury Committee questioning of Bank of England (BoE) policymakers will be observed to gain fresh clues on future policy outlook.

The GBP/USD pair may regain its ground as the Pound Sterling (GBP) could draw further support from the fading odds of further BoE rate cuts, following persistent inflationary pressures in the United Kingdom (UK). Catherine Mann, a member of the BoE Monetary Policy Committee (MPC), stated last week that the bank rate should be held persistently to lean against inflation risks.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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