GBP/USD sticks to modest gains above 1.3300 as dovish Fed outlook weighs on USD

GBP/USD gains some positive traction as dovish Fed expectations undermine the USD.
Bets for a BoE rate cut this month act as a headwind for the GBP and cap spot prices.
Traders also seem reluctant and opt to wait for the FOMC rate decision on Wednesday.

Haresh Menghani FXStreet

The GBP/USD pair attracts some buyers following the previous day's two-way directionless price move and holds steady above the 1.3300 mark during the Asian session on Tuesday. Spot prices, however, lack strong follow-through buying as traders opt to wait on the sidelines ahead of this week's key central bank event risk.

The US Federal Reserve (Fed) is scheduled to announce its policy decision at the end of a two-day meeting on Wednesday and is expected to lower borrowing costs again. The dovish outlook keeps a lid on the recent US Dollar (USD) recovery from its lowest level since late October, touched last week, which, in turn, is seen acting as a tailwind for the GBP/USD pair.

Meanwhile, the Organisation for Economic Cooperation and Development (OECD) upgraded its UK growth forecast last week and predicted that the Bank of England (BoE) will end its easing cycle in the second quarter of 2026. This, in turn, underpins the British Pound (GBP) and turns out to be another factor that offers additional support to the GBP/USD pair.

The GBP bulls, however, seem reluctant to place aggressive bets amid rising bets that the BoE will also cut interest rates next week. The expectations were reaffirmed by the latest UK inflation figures, which showed that the headline Consumer Price Index (CPI) decelerated to the 3.6% YoY rate in October, following a steady print of 3.8% for three consecutive months.

This, in turn, makes it prudent to wait for strong follow-through buying before positioning for an extension of the GBP/USD pair's recent move from the 1.3000 psychological mark, touched in November. Traders now look to the US data – the ADP Weekly Employment Change and JOLTS Job Openings for some impetus later during the North American session.

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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