GBP/USD flat lines around 1.2900 mark, below one-year peak touched on Thursday

GBP/USD consolidates the previous day’s strong move up to a one-year peak.
Rebounding US bond yields revive the USD demand and cap gains for the pair.
Reduced August BoE rate cut bets should help limit any meaningful downfall.

Haresh Menghani FXStreet

The GBP/USD pair seesaws between tepid gains/minor losses around the 1.2900 mark during the Asian session on Friday and remains well within the striking distance of a one-year peak touched the previous day.

The US Dollar (USD) attracts some buyers in the wake of a goodish pickup in the US Treasury bond yields and moves away from a nearly three-month low touched the previous day, which, in turn, acts as a headwind for the GBP/USD pair. Meanwhile, the softer US consumer inflation figures released on Thursday boosted market bets for an imminent start of the Federal Reserve's (Fed) rate-cutting cycle in September. This might keep a lid on any meaningful upside for the US bond yields. Apart from this, the prevalent risk-on environment might hold back traders from placing aggressive bullish bets around the safe-haven buck.

The British Pound (GBP), on the other hand, continues to draw support from Thursday's data showing that Britain's economy grew more quickly than expected, by 0.4% in May. This comes on top of the recent comments by the Bank of England (BoE) policymakers and dashed hopes for a rate cut in August. In fact, the BoE MPC member Catherine Mann said on Wednesday that until there is some deceleration in services prices, she is not in favor of cutting interest rates. Adding to this, BoE Chief Economist Huw Pill noted that there is still some work to do before the domestic persistent component of inflation is gone.

The aforementioned fundamental backdrop seems tilted firmly in favor of bulls and suggests that the path of least resistance for the GBP/USD pair is to the upside. Hence, any meaningful corrective decline might still be seen as a buying opportunity and is more likely to remain limited. Nevertheless, spot prices remain on track to end in the green for the third successive week. Traders now look forward to the release of the US Producer Price Index (PPI) and the University of Michigan Consumer Sentiment survey, due later during the North American session, for short-term opportunities on the last day of the week.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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