GBP/USD maintains position around 1.2950 near 13-month highs

GBP/USD receives support as investors consider UK markets a more attractive investment option.
BoE is expected to start lowering interest rates at the August meeting.
The US Dollar strengthens due to increased risk aversion triggered by the attack on former US President Donald Trump.

Akhtar Faruqui FXStreet

GBP/USD trades around 1.2960 during the Asian session on Tuesday, remaining close 13-month high at 1.2995 recorded in the previous session. The British Pound (GBP) may appreciate further as investors consider UK markets a more attractive investment destination compared to US markets, which face political uncertainties. The decisive victory of Keir Starmer’s Labour Party has assured stable fiscal policies and smooth ministerial appointments.

The increased uncertainty over the timeframe for Bank of England (BoE) rate cuts has been a significant factor in the GBP’s strength. Traders anticipate the BoE to start lowering interest rates at the August meeting.

Traders assess the upcoming economic data on Wednesday that could impact the Bank of England's monetary policy stance. The Consumer Price Index (YoY) is projected to hold steady at the BoE's 2% target, with core inflation anticipated to dip to 3.4%. Additionally, the Retail Price Index is likely to see a decline, marking the fourth drop in five months.

The US Dollar (USD) strengthened amid rising risk aversion triggered by the attempted assassination of former US President Donald Trump on Saturday. However, cooling US inflation strengthened bets for a Federal Reserve rate cut in September, which may limit the upside of the Greenback.

According to CME Group’s FedWatch Tool, markets now indicate an 85.7% probability of a 25-basis point rate cut at the September Fed meeting, up from 71.0% a week earlier.

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, aka ‘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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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