GBP/USD retreats from its highest level since March 2022, slips below 1.3400 mark

GBP/USD attracts some sellers on Friday and is pressured by a modest USD strength.
Bets for another oversized Fed rate cut in November should cap gains for the buck.
A relatively hawkish BoE expectations should contribute to limiting losses for the pair.

Haresh Menghani FXStreet

The GBP/USD pair drifts lower during the Asian session on Friday and moves away from its highest levels since March 2022, around the 1.3435 region touched the previous day. Spot prices slide below the 1.3400 mark in the last hour amid a modest US Dollar (USD) uptick, though any meaningful corrective decline still seems elusive.

The Greenback attracts some buyers and reverses a part of the previous day's losses amid some repositioning trade ahead of the crucial US inflation data – the Personal Consumption Expenditure (PCE) Price Index due later today. In the meantime, rising bets for a more aggressive policy easing by the Federal Reserve (Fed), along with the upbeat market mood, should cap the upside for the safe-haven buck.

Despite the fact that several Federal Reserve (Fed) officials this week tried to push back against bets for a more aggressive policy easing, the markets are pricing in a greater chance of another oversized rate cut in November. This overshadowed Thursday's better-than-expected US macro data and should hold back the USD bulls from placing fresh bets, which, in turn, should lend support to the GBP/USD pair.

Meanwhile, the global risk sentiment remains supported by hopes that interest rate cuts will boost global economic activity. Adding to this, a slew of stimulus measures from the People's Bank of China (PBOC), including Friday's announcement to cut the seven-day repo rate to 1.5% from 1.7% and lower the Reserve Requirement Ratio (RRR) by 50 bps, further boosts investors' appetite for riskier assets.

Furthermore, expectations that the Bank of England's (BoE) rate-cutting cycle is likely to be slower than in the United States (US) should continue to underpin the British Pound (GBP) and contribute to limiting losses for the GBP/USD pair. This makes it prudent to wait for strong follow-through selling before confirming a near-term top for the major, which remains on track to end the week on a positive note.

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

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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