GBP/USD holds steady near 1.3100, bulls have the upper hand amid bearish USD

GBP/USD kicks off the new week on a positive note amid sustained USD selling bias.
The weakening confidence in the US economy continues to weigh on the buck.
The divergent Fed-BoE expectations also act as a tailwind for the currency pair.

Haresh Menghani FXStreet

The GBP/USD pair edges higher at the start of a new week and trades just below the 1.3100 mark during the Asian session, well within striking distance of Friday's swing high. Moreover, the bearish sentiment surrounding the US Dollar (USD) suggests that the path of least resistance for spot prices remains to the upside.

The initial market reaction to US President Donald Trump's decision last week to pause sweeping reciprocal tariffs for 90 days turned out to be short-lived amid heightened concerns over a US recession on the back of the escalating US-China trade war. China’s 84% tariffs on US goods took effect on Thursday, while Trump hiked duties on Chinese imports to an unprecedented 145%. Given that the US still imports several hard-to-replace materials from China, the developments weaken confidence in the American economy. This, in turn, dragged the USD Index (DXY), which tracks the Greenback against a basket of currencies, to its lowest level since April 2022 and continues to act as a tailwind for the GBP/USD pair.

Meanwhile, data released last week showed that the US Consumer Price Index (CPI) contracted 0.1% in March while core CPI increased +2.8% year-on-year, below consensus expectations. This comes on top of worries about the potential economic fallout from an all-out trade war and further lifts bets that the Federal Reserve (Fed) will resume its rate-cutting cycle soon. In fact, markets are now pricing in 90 basis points of rate cuts by the end of this year. In contrast, investors see slightly less chance of a Bank of England (BoE) interest rate cut next month. This, along with signs of stability in the equity markets, turns out to be another factor undermining the safe-haven buck and lending support to the GBP/USD pair.

The aforementioned supportive fundamental backdrop validates the near-term positive outlook for spot prices, though bulls seem reluctant to place aggressive bets and opt to wait for important UK macro releases. The crucial monthly jobs report is due on Tuesday, followed by the latest consumer inflation figures on Wednesday. Apart from this, investors, this week will also confront the release of US monthly Retail Sales data and closely scrutinize Fed Chair Jerome Powell's speech, which will play a key role in influencing the USD price dynamics. This, in turn, should provide some meaningful impetus to the GBP/USD pair during the latter part of the week.

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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