GBP/USD stays near 1.3350 as traders adopt caution due to UK inflation risks
- GBP/USD holds ground as the Pound Sterling steadies on the uncertain BoE policy stance.
- BoE’s Megan Greene signals caution on rate cuts, hints at November pause amid rising inflation risks.
- The US Dollar receives support as strong economic data may slow the Fed’s interest rate cuts.
GBP/USD holds ground after two days of losses, trading around 1.3350 during the Asian hours on Friday. The downside of the pair could be restrained as the Pound Sterling (GBP) may gain ground on the United Kingdom’s (UK) inflation risks and the uncertain Bank of England’s (BoE) policy stance.
BoE policymaker Megan Greene urged caution on rate cuts, suggesting a pause in November as risks to inflation have shifted to the upside. However, Governor Andrew Bailey signaled that more easing is still needed. "But exactly when that will be and how much it will be will depend on the path of inflation going down," Bailey added, while noting that there is some softening in the labor market, alongside cautiousness among consumers.
Additionally, political uncertainty added to market pressure, as Greater Manchester Mayor Andy Burnham called for the re-nationalization of key services and proposed £40 billion in borrowing for housing, a move likely to rattle gilt markets already facing weak demand at bond auctions.
The GBP/USD pair faced challenges as the US Dollar (USD) advanced following stronger-than-expected economic data from the United States (US). Focus shifts toward Personal Consumption Expenditures (PCE) Price Index data, the Federal Reserve’s preferred inflation gauge, due later on Friday.
Robust economic data may prompt the US Federal Reserve (Fed) to adopt a more cautious approach to cutting interest rates. The US Gross Domestic Product (GDP) Annualized grew 3.8% in the second quarter (Q2), coming in above the previous estimate and the estimation of 3.3%. Meanwhile, the GDP Price Index rose 2.1% in the same period, as compared to the expected and previous 2.0% growth. US Initial Jobless Claims declined to 218K last week, the lowest since July. The market expectations were an increase to 235K from 232K previously.
Pound Sterling FAQs
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).
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.
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.
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.
