GBP/USD slides closer to mid-1.3200s, downside seems limited ahead of BoE this week

GBP/USD kicks off the new week on a softer note as the post-NFP USD selloff seems to have abated.
September Fed rate cut bets and concerns about the central bank’s independence might cap the USD.
Traders might refrain from placing aggressive bets ahead of the key BoE policy meeting on Thursday.

Haresh Menghani FXStreet

The GBP/USD pair struggles to capitalize on Friday's solid bounce from the 1.3140 area, or its lowest level since May 12, and kicks off the new week on a softer note. Spot prices currently trade around the 1.3265-1.3260 region, though the downside seems limited as traders might refrain from placing aggressive directional bets ahead of the Bank of England (BoE) meeting later this week.

The UK central bank is widely expected to cut interest rates by 25 basis points (bps) to 4% on Thursday amid concerns around job market prospects. In fact, the UK labour market has weakened recently, and pay growth has cooled more quickly than the BoE's May forecast. However, signs of still sticky inflation suggest that the committee is likely to remain cautious. Nevertheless, the outlook will play a key role in influencing the British Pound (GBP) and provide some meaningful impetus to the GBP/USD pair.

In the meantime, a modest US Dollar (USD) bounce following Friday's dismal US Nonfarm Payrolls (NFP)-inspired slump turns out to be a key factor weighing on spot prices during the Asian session. The upside for the USD seems limited amid the growing acceptance that the Federal Reserve (Fed) will resume its rate-cutting cycle in September. The bets were lifted by a miss in the headline US NFP and a sharp downward revision of June’s job growth, which underlines a significant deterioration in the jobs market.

Meanwhile, US President Donald Trump stepped up his extraordinary attacks on Fed Chair Jerome Powell and called on the board to wrest control of the central bank and lower interest rates. This adds to concerns about the central bank’s independence, which might hold back the USD bulls from placing aggressive bets and limit the downside for the GBP/USD pair heading into the key central bank event. However, last week's breakdown below the 100-day Simple Moving Average (SMA) was seen as a key trigger for bears.

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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