GBP/USD holds steady around 1.3500; seems vulnerable near multi-week low

GBP/USD draws support from a modest USD pullback, though the upside potential seems limited
Reduced Fed rate cut bets and trade jitters could underpin the safe-haven buck and cap the major.
Friday’s weaker UK GDP reaffirms August BoE rate cut bets and could act as a headwind for the GBP.

Haresh Menghani FXStreet

The GBP/USD pair enters a bearish consolidation phase during the Asian session and oscillates in a narrow band around the 1.3500 psychological mark, just a few pips above a three-week low touched on Friday. Moreover, the fundamental backdrop suggests that the path of least resistance for spot prices remains to the downside.

A modest US Dollar (USD) pullback from its highest level since June 25 turns out to be a key factor lending some support to the GBP/USD pair. However, diminishing odds for a near-term reduction in borrowing costs by the Federal Reserve (Fed), amid concerns that US President Donald Trump's trade tariffs would boost inflation, should act as a tailwind for the buck. Apart from this, the risk-off impulse could further benefit the Greenback's relative safe-haven status and contribute to capping the currency pair.

In a further escalation of the trade war, Trump imposed a 30% tariff on imports from Mexico and the European Union starting on August 1. This comes on top of a string of over 20 similar tariff notices Trump has issued since last Monday and a 50% tariff on US copper imports, which continues to weigh on investors' sentiment. The anti-risk flow is evident from a generally weaker tone around the equity markets and should limit any meaningful corrective decline for the safe-haven buck and cap the GBP/USD pair.

Meanwhile, the UK Office for National Statistics reported on Friday that the economy unexpectedly contracted for the second month in a row, by 0.1% in May, following a 0.3 % decline registered in April. Adding to this, the UK Industrial Production fell at a faster pace of 0.9% compared to the 0.6% drop in April, while manufacturing output also fell short of estimates and declined 1% in May. This reinforces bets that the Bank of England (BoE) could reduce interest rates in August and should weigh on the British Pound (GBP).

Traders might also refrain from placing aggressive bets ahead of this week's release of the latest consumer inflation figures from the US and the UK, scheduled on Tuesday and Wednesday, respectively. Furthermore, the BoE Governor Andrew Bailey's appearance on Tuesday and speeches from influential FOMC members should contribute to providing some meaningful impetus 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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