GBP/USD holds steady above mid-1.3500s ahead of UK CPI, Fed/BoE policy meetings

GBP/USD consolidates in a narrow range on Tuesday amid mixed fundamental cues.
BoE rate cut bets undermine the GBP and cap the upside amid a modest USD uptick.
Dovish Fed expectations keep the USD bulls on the defensive and support the major.
Traders also seem reluctant ahead of the crucial Fed/BoE policy meetings this week.

Haresh Menghani FXStreet

The GBP/USD pair lacks any firm intraday directional bias and oscillates in a narrow trading band, above mid-1.3500s during the Asian session on Tuesday. Spot prices, however, remain close to a three-year top touched last Friday as traders opt to wait for this week's key data/central bank event risks before positioning for the next leg of a directional move.

The UK consumer inflation figures are due for release on Wednesday ahead of the crucial Bank of England (BoE) policy meeting on Thursday, which should influence the British Pound (GBP). Moreover, the US Federal Reserve (Fed) interest rate decision on Wednesday will drive the US Dollar (USD) in the near term and provide some meaningful impetus to the GBP/USD pair.

In the meantime, bets that the BoE will cut interest rates more aggressively than anticipated – bolstered by data showing that the UK economy contracted more than expected in April – act as a headwind for the GBP. Adding to this, rising geopolitical tensions in the Middle East underpin the Greenback's relative safe-haven status and contribute to capping the GBP/USD pair.

Meanwhile, the USD bulls seem reluctant to place aggressive bets amid the growing acceptance that the Fed will resume its rate-cutting cycle in September. Apart from this, persistent trade-related uncertainties and US fiscal concerns warrant some caution before positioning for any meaningful USD appreciation. This, in turn, is seen lending some support to the GBP/USD pair.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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