GBP/USD holds steady above 1.3550 as investors await UK GDP, US PPI releases

GBP/USD flat lines near 1.3575 in Thursday’s Asian session.
The UK Unemployment Rate hit a 4-year high of 4.7% amid economic downturn.
UK Q2 GDP and US July PPI reports will be in the spotlight later on Thursday.

Lallalit Srijandorn FXStreet

The GBP/USD pair trades on a flat note around 1.3575 during the Asian trading hours on Thursday. Traders prefer to wait on the sidelines ahead of the key data from both the United Kingdom (UK) and the United States (US). The preliminary reading of UK Gross Domestic Product (GDP) for the second quarter (Q2) will be published later on Thursday, followed by US Producer Price Index (PPI) data for July.

Signs of cooling in the US labor market have pushed futures to bake in a series of rate reductions before the end of the year. This, in turn, might drag the Greenback lower against the Pound Sterling (GBP). Fed funds futures traders are now pricing in nearly a 94% probability of a 25 basis point (bps) cut at the September meeting, up from an 85% chance before the inflation data release, according to the CME FedWatch tool.

Investors brace for the US PPI report later on Thursday. The headline PPI is estimated to show an increase of 2.5% YoY in July, while the core PPI is expected to show a rise of 2.9% YoY during the same report period. If the report shows a hotter-than-expected outcome, this could prompt traders to reduce Fed rate cut bets and help limit the USD’s losses.

Data by the Office for National Statistics (ONS) released on Tuesday showed that the UK Unemployment Rate was unchanged at 4.7% in the three months to June, matching the estimation. This figure registered the highest level since July 2021. Meanwhile, the Average Earnings Excluding Bonus remained at 5.0% in the three months to June.

Traders will keep an eye on the UK Q2 GDP report, as it might offer some hints about the UK interest rate path. Weakening GDP growth could add further pressure to Bank of England (BoE) policymakers at a time when they are worried about elevated inflationary pressures.

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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