- GBP/USD draws support from subdued USD price action, though it lacks bullish conviction.
- BoE Governor predicted four rate cuts in 2025 and contributed to capping gains for the GBP.
- Traders also seem reluctant to place aggressive bets ahead of the US NFP report on Friday.
The GBP/USD pair trades with a mild positive bias for the third straight day and holds steady just above the 1.2700 mark during the Asian session on Thursday. Spot prices, however, lack bullish conviction and remain below the weekly high touched on Monday.
The US Dollar (USD) extends its sideways consolidative price move as traders opt to wait on the sidelines ahead of the release of the US Nonfarm Payrolls (NFP) report on Friday. This, in turn, is seen as a key factor acting as a tailwind for the GBP/USD pair. That said, expectations for a less dovish Federal Reserve (Fed) trigger a modest bounce in the US Treasury bond yields and act as a tailwind for the Greenback.
Investors now seem convinced that US President-elect Donald Trump's tariff plans and expansionary policies will boost inflation. Moreover, comments from a slew of influential FOMC members on Wednesday, including Fed Chair Jerome Powell, suggested that the US central bank will adopt a cautious stance on cutting rates. This leads to a modest recovery in the US Treasury bond yields and acts as a tailwind for the USD.
Apart from this, persistent geopolitical risks stemming from the worsening Russia-Ukraine conflict and trade war fears further offer support to the safe-haven buck. The British Pound (GBP) bulls, meanwhile, remain on the sidelines in the wake of Bank of England (BoE) Governor Andrew Bailey's expected four interest rate cuts in 2025. This further contributes to capping the GBP/USD pair and warrants caution for bulls.
Moving ahead, traders now look forward to the release of the UK Construction PMI for some impetus ahead of the usual Weekly Initial Jobless Claims data from the US later during the early North American session. The immediate market reaction, however, is more likely to be limited as the focus remains glued to the closely-watched US monthly employment details, which will guide Fed policymakers on their next policy decision.
Pound Sterling FAQs
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).
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.
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.
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.
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