GBP/USD steadies around 1.3500 amid rising odds of Fed rate cuts

GBP/USD may further gain ground as US inflation data reinforced expectations for a Fed rate cut in September.
The US Consumer Price Index rose 2.7% YoY in July, against the expected 2.8% increase.
The recent UK jobs data may enable BoE officials to uphold their “gradual and careful” approach to monetary expansion.

Akhtar Faruqui FXStreet

GBP/USD remains steady after registering 0.5% gains in the previous session, trading around 1.3500 during the Asian hours on Wednesday. The pair further appreciates as the US Dollar (USD) struggles, driven by the latest United States (US) inflation data, which strengthened expectations for a US Federal Reserve rate cut in September.

The US Consumer Price Index (CPI) climbed 2.7% year-over-year in July, matching the 2.7% increase seen in the prior month, and came in below the expected 2.8% increase. Meanwhile, the annual core CPI rose by 3.1% in July, compared to the 2.9% rise seen in June, above the market consensus of 3%.

Markets are now pricing in approximately 94% odds of a Fed rate cut at the September meeting, up from 86% a day ago, according to the CME FedWatch tool. Last week, Fed Governor Michelle Bowman stated that three interest rate cuts are likely to be appropriate this year.

The GBP/USD pair strengthened as the Pound Sterling (GBP) gained ground, as Tuesday’s upbeat United Kingdom (UK) labor market data could allow Bank of England (BoE) officials to maintain their “gradual and careful” monetary expansion stance.

UK Employment Change reported a fresh 239K jobs created in the second quarter, surpassing the 134K workers hired in the three months ending May. The ILO Unemployment Rate remained consistent at 4.7%, as expected. Claimant Count Change for July declined by 6.2K, while it was expected to increase to 20.8K. Traders shift their focus to Thursday’s UK Preliminary Q2 Gross Domestic Product (GDP) and factory data for June.

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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