GBP/USD rises above 1.3500 as BoE rate cut odds fade, US Dollar weaken

GBP/USD receives support as the Pound Sterling rises amid fading odds of further BoE rate cuts.
UK Chancellor of the Exchequer Rachel Reeves may boost revenues by introducing a windfall tax on commercial lenders.
The US Dollar weakens as markets increase bets on a Federal Reserve rate cut in September.

Akhtar Faruqui FXStreet

GBP/USD appreciates after registering slight losses in the previous session, trading around 1.3530 during the European hour on Monday. The pair remains stronger as the Pound Sterling (GBP) receives support from the fading odds of further BoE rate cuts, driven by persistent inflationary pressures in the United Kingdom (UK). Catherine Mann, a member of the BoE Monetary Policy Committee (MPC), stated last week that the bank rate should be held persistently to lean against inflation risks.

The Pound Sterling holds gains following low-tier data from the United Kingdom. The non-seasonally adjusted UK Nationwide Housing Prices climbed 2.1% year-on-year in August, easing from a 2.4% gain in July. On a monthly basis, prices fell 0.1%, against an expected 0.2% increase and a 0.5% previous rise.

Nationwide’s Chief Economist, Robert Gardne,r highlighted that house price growth remains subdued, citing stretched affordability as prices stay high relative to incomes and mortgage costs exceed three times their pre-pandemic levels.

UK Chancellor of the Exchequer Rachel Reeves could boost revenues by imposing a windfall tax on commercial lenders to recover the profits they are making from taxpayers on deposits held at the Bank of England (BoE), Bloomberg reported on Friday.

The GBP/USD pair gains ground as the US Dollar (USD) faces challenges due to rising odds of an interest rate cut by the US Federal Reserve (Fed) in the September meeting. Traders are now pricing in more than 87% of a 25 basis points (bps) rate cut by the Fed at the September policy meeting, up from an 84% chance a week ago, according to the CME FedWatch tool.

Traders are likely to await a slew of labor market releases this week that could shape the US Federal Reserve’s (Fed) policy decision in September. Key reports include ADP Employment Change, Average Hourly Earnings, and Nonfarm Payrolls for August.

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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