GBP/USD steadily climbs above mid-1.3200s amid a softer USD; bulls lack conviction

GBP/USD recovers slightly from over a one-month low as the USD bulls pause for a breather.
The Fed’s hawkish outlook should limit any USD corrective fall and cap gains for spot prices.
Bets for a BoE rate cut in August might undermine the GBP and act as a headwind for the pair.

Haresh Menghani FXStreet

The GBP/USD pair attracts some buyers during the Asian session on Thursday and reverses a part of the previous day's decline to the lowest level since May 13. Spot prices currently trade just above mid-1.3200s, though the fundamental backdrop warrants some caution before positioning for any meaningful recovery.

The US Dollar (USD) enters a bullish consolidation phase following Wednesday's post-FOMC spike to a two-month peak and is seen as a key factor acting as a tailwind for the GBP/USD pair. Any meaningful USD depreciation, however, seems elusive in the wake of the Federal Reserve's (Fed) hawkish tilt. In fact, Fed Chair Jerome Powell, while speaking to reporters during the post-meeting press conference, showed no preference for cutting rates at the next meeting in September.

This, along with he upbeat US macro data released on Wednesday, should act as a tailwind for the USD and cap the GBP/USD pair. Automatic Data Processing reported that private payrolls in the US rose by 104,000 jobs in July, following a revised 23,000 fall recorded in the previous month. Moreover, the Advanced US Gross Domestic Product (GDP) report showed that the economy expanded at a 3.0% annualized pace during the second quarter after contracting by 0.5% in the first quarter.

Adding to this, the uncertainty over the extension of the US-China trade truce could limit deeper losses for the safe-haven buck. The British Pound (GBP), on the other hand, might struggle to lure buyers amid the growing acceptance that the Bank of England (BoE) will cut interest rates by 25 basis points at the upcoming meeting on August 7. This might further contribute to capping the GBP/USD pair and warrants caution before placing aggressive bullish bets or positioning for further gains.

Even from a technical perspective, the overnight breakdown through the 100-day Simple Moving Average (SMA) was seen as a key trigger for bearish traders. Investors now look forward to the release of the US Personal Consumption Expenditure (PCE) Price Index, due later during the North American session. The Fed's preferred inflation gauge will play a key role in influencing the USD price dynamics and produce short-term trading opportunities around the GBP/USD pair.

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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