GBP/USD rally grinds to a halt, but downside remains limited

GBP/USD managed to eke out a fresh 13-month high before falling back.
Cable ended Thursday where it started, trading on the north side of 1.3000.
UK PMI figures improved across the board, but mixed US PMIs spark risk aversion.

Joshua Gibson FXStreet

GBP/USD tipped into another fresh 13-month peak on Thursday, climbing to 1.3130 before broader market sentiment took a turn for the worse, bolstering the Greenback. Cable was dragged back to the day’s opening bids around 1.3090 after US Purchasing Managers Index (PMI). figures came in lopsided.

Forex Today: Investors look at Jackson Hole and rate cut bets

Friday will see all eyes turned to Federal Reserve (Fed) Chairman Jerome Powell who is slated to speak at the Jackson Hole Economic Symposium. Markets are hoping that the Fed head will introduce firmer guidance on how likely the Fed is to cut in September, as well as for how much.

Market participants continue to pine for a September cut, but Thursday’s PMI data sparked a pullback from a recent upswing into bets that the Fed would cut 50 bps on September 18. Rate markets have pulled back to a healthier overall expectation of a single quarter-point cut in September, pricing in around 75% odds of a 25 bps rate trim.

UK PMI figures broadly bumped to a higher-than-expected print in August, with the Composite, Manufacturing, and Services PMI components all printing above forecasts and rising from their previous figures. UK Services activity rose to 53.3 from the previous 52.5, vaulting over the forecast 52.8 and rising to the indicator’s highest level since April.

US Manufacturing PMI figures tumbled back to 48.0 in August, well below the forecast steady print of 49.6. The US Services PMI unexpectedly tick upwards to 55.2 from 55.0 compared to the forecast decline to 48.0. Despite the upswing in Services PMI numbers, underlying employment figures continue to show a shortening in the US labor market, adding to concerns that were mostly ignored when the US Bureau of Labor Statistics retroactively wiped over 800K jobs from March’s Nonfarm Payrolls (NFP) print this week.

GBP/USD price forecast

Cable has snapped a five-day win streak, but bidding pressure in GBP/USD is still poised for a breach into multi-year highs, provided buyers can maintain pressure long enough to keep prices climbing beyond 2023’s July peak of 1.3142. Odds favor the buyers as GBP/USD has closed in the green for all but one of the last ten consecutive trading days.

GBP/USD daily chart

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

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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