GBP/USD moves above 1.3700, marks fresh multi-year highs

GBP/USD has reached 1.3724, a fresh high since January 2022, on Thursday.
Fed Chair Powell warned that Trump's tariff policies could lead to more persistent inflation.
BoE’s Bailey highlighted the risks of slowing wage growth and rising economic inactivity.

Akhtar Faruqui FXStreet

GBP/USD extends its winning streak for the fourth successive session, trading around 1.3710 during the Asian hours on Thursday. The pair has marked 1.3724, a fresh high since January 2022, which was recorded on Thursday. The risk-sensitive GBP/USD pair receives support from the improved risk appetite, driven by a fragile US-brokered Israel-Iran ceasefire.

US President Donald Trump noted that the United States (US) and Iran would hold a meeting next week but questioned the need for a diplomatic solution on Iran's nuclear program, citing the damage that American bombing had done to key sites, per Bloomberg.

Moreover, traders assess the cautious remarks from the Federal Reserve (Fed) Chair Jerome Powell. Powell noted on Wednesday that Trump's tariff policies may cause a one-time price hike, but they could also lead to more persistent inflation. The Fed should be careful in considering further rate cuts.

Traders also adopt caution amid speculation that US President Donald Trump may announce a successor for Fed Chair Jerome Powell by September or October. Trump might choose former Fed Governor Kevin Warsh or National Economic Council Director Kevin Hassett, according to the Wall Street Journal.

In the United Kingdom (UK), the Bank of England (BoE) Governor Andrew Bailey stated in his testimony before the Lords Economic Affairs Committee on Tuesday that the central bank has started seeing “labour market softening, and wage settlements are likely to come off," Bailey added that the increase in employers’ contribution to social security schemes seems to be “affecting labour market”. He also pointed to slowing wage growth and rising economic inactivity.

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

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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