GBP/USD returns above 1.3400 as the US Dollar rally loses steam

GBP/USD returns above 1.34 after bouncing from 1.3362 lows.
Strong US employment and manufacturing data boosted the US Dollar on Thursday.
In the UK, the upbeat monthly GDP eased concerns about the Budget.

Guillermo Alcala FXStreet

The Pound is trimming losses against the US Dollar on Friday, with price action returning above 1.3400 ahead of the US session opening, up from Thursday's lows near 1.3360. The pair is on track to end the week practically unchanged after depreciating about 0.7% in the previous two weeks.

The US Dollar drew support from the unexpected decline in US Initial Jobless Claims on Thursday, which dropped in the week of January 10 to their lowest levels since November. Beyond that, the New York Empire State and Philadelphia Fed Manufacturing reports highlighted a solid improvement in business conditions in their respective regions, boosting confidence in a solid US economic recovery.

These figures cemented expectations that the Federal Reserve (Fed) will keep its monetary policy unchanged, which were reinforced by the hawkish rhetoric of Atlanta Federal Reserve (Fed) President Raphael Bostic and Kansas City Federal Reserve President Jeffrey Schmid later on Thursday.

In the UK, November’s Gross Domestic Product beat expectations with a 0.3% growt, to offset October’s 0.1% contraction, boosted by a strong performance of the manufacturing and services sectors. The data eased market concerns about the economic impact of the Labour Cabinet’s Budget and provided some support to the GBP.

On Friday, the focus will be on US Industrial Production, which is expected to have slowed in December, and on comments from Fed vice chairs Michelle Bowman and Philip Jefferson.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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