GBP/USD retakes 1.3200 amid softer USD; upside potential seems limited

GBP/USD attracts some buyers as the USD retreats following the post-FOMC move up.
The Fed’s hawkish outlook could limit USD downside amid reviving safe-haven demand.
Concerns about the UK’s fiscal situation and BoE rate hike bets cap gains for spot prices.

Haresh Menghani FXStreet

The GBP/USD pair builds on the previous day's late rebound from the 1.3140 horizontal support, or the lowest level since May, and gains some positive traction during the Asian session on Thursday. Spot prices climb back above the 1.3200 mark in the last hour amid a modest US Dollar (USD) weakness, though the fundamental backdrop warrants some caution for bullish traders.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, retreats further from an over two-week high, touched in reaction to the Federal Reserve's (Fed) relatively hawkish outlook on Wednesday. Investors remain concerns that a prolonged US government shutdown would affect the economic performance, which, in turn, is seen undermining the USD and offering some support to the GBP/USD pair.

Meanwhile, Fed Chair Jerome Powell pushed back against market expectations for another interest rate cut in December. This, along with reviving safe-haven demand on the back of the market anxiety ahead of the critical meeting between US President Donald Trump and Chinese leader Xi Jinping, could limit losses for the safe-haven buck. Apart from this, worries about the UK's fiscal situation might cap the GBP/USD pair.

Reports suggest that the UK Office for Budget Responsibility (OBR) is expected to lower productivity forecasts by about 0.3%, which could widen the fiscal gap by over £20 billion. This comes ahead of Finance Minister Rachel Reeves' Autumn budget on November 26 and might hold back traders from placing aggressive bullish bets around the British Pound (GBP) amid rising bets for more rate cuts by the Bank of England (BoE).

Traders now see a roughly 68% chance that the UK central bank will cut interest rates by 25-basis-points (bps) in December, as softer inflation and fiscal headwinds provide a greater scope to ease policy. This, in turn, makes it prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has formed a near-term bottom around the 1.3140 area and positioning for any meaningful appreciating move.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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