GBP/USD falls toward 1.3600 ahead of BoE policy decision

GBP/USD slips as the Pound Sterling weakens ahead of the Bank of England’s interest rate decision.
The BoE is expected to hold rates in February after a narrow December cut, with limited impact on long-term fundamentals.
The US Dollar gains on the emerging likelihood of a slower pace of Fed rate cuts.

Akhtar Faruqui FXStreet

GBP/USD extends its losses for the second successive session, trading around 1.3620 during the Asian hours on Thursday. The pair weakens as the Pound Sterling (GBP) comes under pressure ahead of the Bank of England’s (BoE) interest rate decision later in the day.

The BoE’s MPC is widely expected to keep policy unchanged in February, with little anticipated to alter longer-term fundamentals after a narrow 5–4 vote to cut rates by 25 bps in December.

The GBP/USD pair depreciates as the US Dollar (USD) advances on hawkish signals from the Federal Reserve (Fed) and expectations of a slower pace of US rate cuts. Moreover, the implications of Kevin Warsh’s nomination as Fed chair is citing his preference for a smaller balance sheet and a less aggressive approach to rate reductions.

However, US President Donald Trump said he would not have nominated Warsh if he favored rate hikes. Trump further stated that there was “not much” doubt the US central bank would lower rates because “we’re way high in interest,” but now “we’re a rich country again.”

On data front, the ADP Employment Change showed private payrolls increased by just 22K in January, well below market expectations for a stronger 48K reading and 37K (revised from 41K) prior. The weak print carried extra weight given the postponement of official government data. Institute for Supply Management (ISM) remained unchanged in January, with the ISM Services PMI holding steady at 53.8. The print, however, came in above analysts' expectations of 53.5.

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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