GBP/USD holds gains around 1.3300 as US Dollar weakens following Moody’s downgrade

GBP/USD rises as US Dollar weakens in response to Moody’s decision to downgrade the US credit rating by one notch.
A series of weak US economic indicators has strengthened expectations of further Federal Reserve rate cuts later this year.
The Pound Sterling has strengthened, supported by UK GDP data released on Thursday that exceeded expectations.

Akhtar Faruqui FXStreet

The GBP/USD pair recovered from prior session losses, trading near the 1.3300 level during Asian session on Monday. The rebound is largely driven by renewed pressure on the US Dollar (USD) after Moody’s Investors Service downgraded the US credit rating by one notch, from Aaa to Aa1. The agency cited escalating debt levels and a growing burden from interest payments as primary concerns.

This move aligns with previous downgrades by Fitch Ratings in 2023 and Standard & Poor’s in 2011. Moody’s now forecasts US federal debt to rise to approximately 134% of GDP by 2035, up from 98% in 2023. The federal deficit is projected to widen to nearly 9% of GDP, fueled by mounting debt-servicing costs, increased entitlement spending, and declining tax revenues.

Further weighing on the Greenback, a series of weak US economic indicators has reinforced expectations of rate cuts by the Federal Reserve later this year. Notably, the University of Michigan’s Consumer Sentiment Index fell sharply to 50.8 in May from 52.2 in April, the lowest level since June 2022 and the fifth consecutive monthly decline. Analysts had forecast a rise to 53.4.

Despite these headwinds, the US Dollar may find some support from easing global trade tensions. A preliminary trade deal between the US and China proposes significant tariff reductions—Washington is set to lower duties on Chinese goods from 145% to 30%, while Beijing will cut tariffs on US imports from 125% to 10%.

Market sentiment is also lifted by renewed optimism over a potential US-Iran nuclear deal and upcoming talks between US President Donald Trump and Russian President Vladimir Putin aimed at de-escalating the Ukraine conflict.

Meanwhile, the Pound Sterling (GBP) has gained momentum, underpinned by stronger-than-expected UK GDP data released on Thursday. Both monthly and quarterly figures showed robust economic growth, bolstering expectations that the Bank of England (BoE) may maintain its current interest rate stance should inflation remain persistent or accelerate further.

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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