GBP/USD holds steady above 1.3250 as investors brace for US ISM Services PMI release

GBP/USD flat lines around 1.3280 in Tuesday’s Asian session.
Traders are now pricing in a 94% possibility of a Fed rate reduction in September.
The BoE is scheduled to announce its monetary policy decision on Thursday.

Lallalit Srijandorn FXStreet

The GBP/USD pair trades on a flat note near 1.3280 during the Asian trading hours on Tuesday. Nonetheless, rising odds of Federal Reserve (Fed) rate cuts could weigh on the US Dollar (USD) against the Cable. Investors will keep an eye on the US ISM Services Purchasing Managers Index (PMI) data, which is due later on Tuesday.

Soft US job data released on Friday prompted investors to ramp up bets of imminent Federal Reserve (Fed) rate cuts, which undermine the Greenback. The US employment growth undershot expectations in July, and the Nonfarm Payrolls (NFP) count for the prior two months was revised down by a massive 258K jobs, indicating a sharp deterioration in US labor market conditions.

Markets are now pricing in nearly a 95% odds the Fed will ease rates next month owing to the weaker-than-expected US employment data, with over 63 basis points (bps) worth of cuts expected by December, according to Reuters.

The Bank of England (BoE) interest rate decision will take center stage on Thursday. The UK central bank is widely expected to cut interest rates at the August meeting to prevent the economy from sliding backwards amid rising unemployment and the hit to global trade from US tariffs.

Financial markets have priced in more than an 80% chance of BoE rate cuts at the August meeting and are penciling in a further quarter-point reduction before the end of the year. Traders will closely monitor the BoE's Governor Bailey speech after the monetary policy meeting. Any dovish remarks could drag the Pound Sterling (GBP) lower in the near term.

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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