GBP/USD holds gains near 1.2450, downside risks appear due to hawkish Fed

GBP/USD could face challenges due to increased trade war tensions following Trump’s tariffs.
The US Dollar may appreciate as Fed’s Powell signaled there is no urgency to cut interest rates.
The British Pound may struggle as BoE’s Mann expressed dovish views on interest rate outlook on Tuesday.

Akhtar Faruqui FXStreet

GBP/USD remains steady after registering gains in the previous session, trading around 1.2450 during the Asian hours on Wednesday. However, the pair could face challenges as US President Donald Trump’s 25% tariff hike has increased trade war tensions.

Additionally, Fed Chair Jerome Powell’s cautious indication regarding the US policy outlook could provide support for the US Dollar (USD) and limit the upside of the GBP/USD pair. Powell said in his semi-annual report to Congress that the Fed officials “do not need to be in a hurry" to cut interest rates due to strength in the job market and solid economic growth. He added that US President Donald Trump's tariff policies could put more upward pressure on prices, making it harder for the central bank to lower rates.

Investors now await the release of the US Consumer Price Index (CPI) inflation data on Wednesday, which could shape expectations for the Fed’s monetary policy. Headline CPI inflation is projected to remain steady at 2.9% year-over-year, while core CPI inflation is expected to ease slightly to 3.1% from the previous 3.2%.

The Pound Sterling (GBP) may encounter headwinds after Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann expressed dovish views on interest rate guidance in a Tuesday interview with the Financial Times (FT).

BoE’s Mann stated that she had shifted her stance on policy, citing significantly weaker demand conditions. She also expressed confidence that inflation would align with the BoE’s 2% target later this year while noting a “non-linear” decline in employment.

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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