- GBP/USD drifts lower to near 1.2925 in Friday’s early European session.
- The UK GDP declined 0.1% MoM in January, weaker than expected.
- Traders raise their bets that the Fed will restart its rate cuts in June.
The GBP/USD pair loses ground to near 1.2925 during the early European session on Friday. The Pound Sterling (GBP) edges lower after the release of UK growth numbers. The attention will shift to the preliminary Michigan Consumer Sentiment for March, which will be published later on Friday.
Data released by the Office for National Statistics (ONS) showed on Friday that the UK economy contracted 0.1% over the month in January. The reading missed the estimation of 0.1% growth in the reported period. Meanwhile, UK Industrial Production declined 0.9% MoM in January versus 0.5% prior, below the market consensus of -0.1%. The GBP attracts some sellers in an immediate reaction to the downbeat UK GDP data.
The Bank of England (BoE) is expected to hold interest rates steady at the next Monetary Policy Committee meeting next week as most policymakers have guided a ‘gradual and cautious’ policy-easing approach. That would leave the base rate unchanged at 4.5%. In the February meeting, the UK central bank decided to reduce its interest rates by 25 basis points (bps) amid concerns over growth prospects.
The softer US consumer and producer inflationary pressures could pave the way for the Federal Reserve (Fed) to cut interest rates in the June policy meeting, which might help limit the pair’s losses. Previously, Barclays projected a single 25 basis points (bps) cut in June. Short-term interest-rate futures have priced in nearly 75% odds of a quarter-point reduction to the Fed's policy rate by June, according to the CME FedWatch tool.
Pound Sterling FAQs
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).
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.
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.
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.
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