GBP/USD holds ground above 1.3300 due to BoE's cautious outlook

GBP/USD maintains its position as the Pound Sterling receives support from the cautious tone surrounding the BoE’s policy stance.
BoE Mann said that policy must remain restrictive for longer while the inflation remains stubborn.
The US Dollar could further advance as risk aversion increases amid the ongoing government shutdown.

Akhtar Faruqui FXStreet

GBP/USD inches higher after three days of losses, trading around 1.3310 during the Asian hours on Friday. The pair may appreciate as the Pound Sterling (GBP) may gain ground amid cautious sentiment surrounding the Bank of England’s (BoE) monetary policy stance.

The BoE policymaker Catherine Mann said on Thursday that the monetary policy must remain restrictive for longer to create an environment conducive to growth. Mann also added that " Inflation remains persistent and the outlook for growth remains modest," per Reuters.

UK Chief Secretary to the Treasury James Murray said in a letter shared by the finance ministry on Wednesday that the administration would not permit agencies to use emergency funds to fund pay rises, aiming to restrict the wage spiral. “This prudent but tough approach to public spending is what will help build a stable economy," Murray added.

However, the GBP/USD pair may further lose ground as the US Dollar (USD) could receive further support from increased risk aversion, driven by the ongoing government shutdown. The US Senate remained deadlocked on legislation to end the government shutdown.

However, the Greenback may struggle due to prevailing dovish sentiment surrounding the US Federal Reserve’s (Fed) policy outlook. Fed Bank of San Francisco President Mary Daly said on Friday that inflation has come in much less than she had feared. Daly further stated that the US central bank is projecting additional cuts in risk management.

Fed Governor Michael Barr said that the current outlook poses challenges for judging the stance of monetary policy and deciding the right path forward. Barr also noted that the Fed's rate cut in September was appropriate, and the current policy rate is still modestly restrictive. He added that it's hard to judge at this point whether the federal government shutdown will leave an imprint on the overall economy.

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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