GBP/USD holds ground around 1.3350 as US Dollar weakens ahead of Fed decision

GBP/USD inches higher, extending its recovery after rebounding from Tuesday’s two-month low of 1.3307.
The Fed is anticipated to leave its benchmark interest rate unchanged in July.
The Pound Sterling faced headwinds amid cooling labor market conditions and persistent inflationary pressures.

Akhtar Faruqui FXStreet

GBP/USD edges higher after four days of losses, trading around 1.3360 during the Asian hours on Wednesday. The pair gains ground as the US Dollar (USD) remains subdued ahead of US Federal Reserve (Fed) interest rate decision later in the North American session.

The US Fed is widely expected to leave its benchmark interest rate unchanged at 4.25% to 4.50% in July. Traders are now pricing in 97% odds of no change to interest rates at the July meeting, according to the CME FedWatch tool.

The FOMC press conference will be observed for any signs that rate cuts may start in September. Traders are also awaiting key economic data this week, including the Q2 Personal Consumption Expenditures (PCE) inflation report and July’s Nonfarm Payrolls, for further insight into the health of the US economy.

However, the GBP/USD pair faced challenges as the Pound Sterling (GBP) struggled due to cooling labor market conditions and elevated inflationary pressures. This scenario could force the Bank of England (BoE) to perform a balancing act in its monetary policy decision next week.

Meanwhile, lifted food sales, overall economic momentum remains weak, with disappointing PMI data fueling expectations of a 25 basis point rate cut by the Bank of England in August, and another likely by year-end as it pivots toward supporting growth.

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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