- GBP/USD remains depressed for the second straight day amid a further USD recovery.
- The risk-off impulse benefits the safe-haven buck, though Fed rate cut bets cap gains.
- Diminishing odds for a BoE rate cut in August to lend support ahead of UK Retail Sales.
The GBP/USD pair prolongs its corrective decline from a one-year peak, around the 1.3045 region touched earlier this week and drifts lower for the second successive day on Friday. Spot prices drop to the 1.2935-1.2930 area, or a fresh weekly low during the Asian session amid some follow-through US Dollar (USD) buying, albeit lack bearish conviction.
Concerns over a renewed trade war between the US and China, along with persistent geopolitical tensions, temper investors' appetite for riskier assets. This led to the overnight slump in the US equities and led to a downfall across Asian markets, which assists the safe-haven buck to build on its recovery from nearly a four-month low and acts as a headwind for the GBP/USD pair. That said, dovish Federal Reserve (Fed) expectations might hold back the USD bulls from placing aggressive bets and lend some support to the currency pair.
Market participants now seem convinced and are pricing in a 100% chance that the US central will begin its rate-cutting cycle in September. The bets were reaffirmed by the US Initial Jobless Claims data released on Thursday, which pointed to a loosening labor market. This comes on top of ebbing inflation and sets the stage for the Fed to start lowering borrowing costs. In contrast, investors have been pricing out the possibility of a rate cut by the Bank of England (BoE) in the wake of Wednesday's higher-than-expected UK CPI print.
Apart from this, a better-than-anticipated UK GDP growth of 0.4% in May might continue to underpin the British Pound (GBP) and contribute to limiting losses for the GBP/USD pair. Traders now look forward to the release of UK monthly Retail Sales data for a fresh impetus. Later during the North American session, speeches by influential FOMC members will drive the USD demand and produce short-term trading opportunities. Nevertheless, spot prices, for now, seem poised to register weekly losses for the first time in the previous four.
Pound Sterling FAQs
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).
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.
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.
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.
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