GBP/USD holds positive ground above 1.3700, all eyes on US PCE release

GBP/USD strengthens to around 1.3735 in Friday’s Asian session.
Concerns about the Fed's independence and expectations for early US rate cuts weigh on the US Dollar.
The US PCE inflation data for May will take center stage later on Friday.

Lallalit Srijandorn FXStreet

The GBP/USD pair holds positive ground near 1.3735 during the Asian trading hours on Friday. The prospect of Trump announcing the next Fed Chair weighs on the US Dollar (USD) against the Pound Sterling (GBP). The US Personal Consumption Expenditures (PCE) - Price Index data for May will be in the spotlight later on Friday.

The concerns over the future independence of the Fed continue to undermine the Greenback and create a tailwind for the major pair. US President Donald Trump said that he was considering selecting the next Fed Chair early fuelled fresh bets on US rate cuts. Trump said that he has a list of potential Powell successors down to “three or four people,” without naming the finalists.

Furthermore, the weaker-than-expected US Gross Domestic Product (GDP) data also dragged the USD lower. The US economy shrank faster than expected during the first three months this year, falling by 0.5%, the US Bureau of Economic Analysis (BEA) reported on Thursday. This figure came in below the previous estimate and the market consensus of -0.2%.

On the other hand, the dovish remarks from the Bank of England (BoE) might cap the upside for the major pair. BoE Governor Andrew Bailey warned earlier this week that there were now signs that the UK labor market was softening and he emphasized his view that interest rates are likely to continue falling. The UK central bank left interest rates unchanged at 4.25% at the June meeting, although three of the nine members of the Monetary Policy Committee (MPC) voted to cut interest rates.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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