GBP/USD rises above 1.3450 on rising odds of further Fed rate cuts

GBP/USD gains ground as the US Dollar weakens due to the increasing likelihood of more Fed rate cuts in 2025.
The CME FedWatch Tool indicates the pricing in a 97% chance of a Fed rate cut in October.
The Pound Sterling gains ground as the UK economy rose in the second quarter.

Akhtar Faruqui FXStreet

GBP/USD extends its winning streak for the fourth successive session, trading around 1.3460 during the Asian hours on Wednesday. The pair may further appreciate as the US Dollar (USD) faces challenges after soft US jobs data increased the odds of Federal Reserve (Fed) rate cuts. The CME FedWatch Tool suggests that markets are now pricing in nearly a 97% chance of a Fed rate cut in October and a 76% possibility of another reduction in December.

The recent US Job Openings showed the labor market is slowing, yet vacancies rose from 7.21 million to 7.23 million in August. Meanwhile, the hiring rate edged down to 3.2%, the lowest level since June 2024, while layoffs remained at a low level. Traders are likely to await the release of September’s US ADP Employment Change and ISM Manufacturing PMI data, which could be affected due to the government shutdown.

The US government has shut down, with around 750,000 federal employees facing furloughs after Congress failed to pass funding bills. The US Labor Department said Monday that its statistics agency would suspend data releases, including Friday’s closely watched monthly jobs report, if a partial shutdown occurs.

The GBP/USD pair gained ground as the Pound Sterling (GBP) received support after the stronger United Kingdom (UK) Gross Domestic Product (GDP) data for the second quarter was released on Tuesday. The figures showed that the UK economy rose by 1.4% YoY, faster than the preliminary release of 1.2%. Quarter-on-quarter GDP growth remained in line with flash estimates of 0.3%.

However, the British pound could come under pressure as Bank of England (BoE) Deputy Governor Dave Ramsden has advocated for a rate cut amid mounting concerns in the UK labor market. Ramsden also expressed confidence that inflationary pressures will ease, noting that current interest rates remain restrictive.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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