GBP/USD finds a weak floor ahead of BoE rate call

GBP/USD caught a thin foothold near the 1.3000 major handle on Wednesday.
The Bank of England is on deck with its latest interest rate decision on Thursday.
With official data dark in the US, wonky private data has taken center stage.

Joshua Gibson FXStreet

GBP/USD grappled with a near-term technical floor on Wednesday, finding some breathing room just north of 1.3000. A thin, dead-cat-style bounce has greeted Cable traders following several weeks of one-sided declines. The Bank of England (BoE) and its latest interest rate decision looms large on Thursday, and volatile private datasets have taken precedence in US data flows as the US government shutdown keeps official economic data sources dark.

The Cable pair heads into Thursday’s market sessions battling near the 1.3050 level. GBP/USD is down a little over 3% from its last swing high near 1.3470 in mid-October, having lost ground for all but two of the last 13 consecutive trading days.

It’s been a quiet week on the UK side of the economic data docket in the runup to the BoE’s latest rate call. However, significant shifts in the BoE’s interest rate stance are not expected. The Monetary Policy Committee (MPC) is expected to vote six-to-three to keep interest rates unchanged. The addition of another rate cut vote will be of some note for particularly attentive central bank policy wonks; however, meaningful changes in the BoE’s interest rate stance are unlikely to materialize with the UK’s headline inflation rate standing at 3.8% as of August, nearly double the BoE’s preferred 2% target band.

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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