GBP/USD posts modest gains above 1.3450, concerns over UK’s fiscal outlook might cap its upside

GBP/USD rebounds to near 1.3465 in Monday’s early Asian session.
Fresh concerns over the UK’s fiscal outlook could weigh on the Pound Sterling.
Fed delivered a rate cut last week and signaled that two more reductions are expected by the end of the year.

Lallalit Srijandorn FXStreet

The GBP/USD pair recovers some lost ground to around 1.3465, snapping the three-day losing streak during the early Asian session on Monday. However, the potential upside for the Pound Sterling (GBP) might be limited amid concerns that UK Finance Minister Rachel Reeves may not be able to keep her budget under control. The Bank of England (BoE) Chief Economist Huw Pill is set to speak later on Monday.

The latest public finance figures showed that public sector net borrowing hit £18 billion, the highest for the month in five years. Economists expected government borrowing to come in significantly lower at £12.8 billion. Analysts believe that the move threatens to worsen the debt burden and intensify fiscal risks, which might exert some selling pressure on the Cable.

The BoE voted to keep interest rates on hold at 4.0% on Thursday amid an uncertain growth outlook and a weaker jobs market. The decision came after the UK central bank last reduced the key interest rate by 25 basis points (bps) in August. The BOE reiterated that a “gradual and careful further withdrawal of monetary policy restraint remains appropriate.” This, in turn, might help limit the major pair’s losses in the near term.

On the USD’s front, the US Federal Reserve (Fed) last week approved a widely anticipated rate cut and signaled that two more reductions are on the way before the end of the year. However, Fed Chair Jerome Powell emphasized the rate cut as a "risk-management cut" and stated that future decisions would be made "meeting by meeting," suggesting a less aggressive easing cycle than some investors anticipated.

Traders will take more cues from the Fedspeak later on Monday. The remarks from Fed officials might offer some hints about the US interest rate outlook. Any dovish comments from policymakers could weigh on the Greenback and create a tailwind for 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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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