GBP/USD sticks to modest recovery gains above 1.2900, lacks bullish conviction

GBP/USD kicks off the new week on a positive note amid the emergence of some USD selling.
September Fed rate cut bets, along with the US political development, weigh on the Greenback.
Diminishing odds for an August rate cut by BoE support prospects for further gains for the GBP.

Haresh Menghani FXStreet

The GBP/USD pair attracts some buyers during the Asian session on Monday and for now, seems to have stalled its corrective slide from the 1.3045 area, or a one-year peak touched last week. Spot prices currently trade around the 1.2930 region, up over 0.10% for the day, though remain close to a one-week low set last Friday.

The US Dollar (USD) kicks off the new week on a weaker note in reaction to the US political development over the weekend and turns out to be a key factor lending some support to the GBP/USD pair. Following a long week of political turmoil, US President Joe Biden stepped down from the 2024 Presidential election. This, in turn, increases the chances of Donald Trump becoming the next US President, which, along with bets that the Federal Reserve (Fed) will cut interest rates in September, boosts investors' appetite for riskier assets and undermines the safe-haven Greenback.

The British Pound (GBP), on the other hand, continues to draw support from diminishing odds of an interest rate cut by the Bank of England (BoE) in August. In fact, BoE Chief Economist Huw Pill noted earlier this month that there is still some work to do before the domestic persistent component of inflation is gone. Adding to this, the UK consumer inflation rose slightly more than expected, by the 2% YoY rate in June. This comes on top of a better-than-expected GDP growth of 0.4% in May and forced investors to push back their expectations for an imminent rate cut.

Moving ahead, there isn't any relevant market-moving economic data due for release on Monday, either from the UK or the US, leaving the GBP/USD pair at the mercy of the USD price dynamics. Hence, the market focus will remain glued to the US political development, which will drive the broader risk sentiment and influence the buck. Nevertheless, the aforementioned fundamental backdrop seems tilted firmly in favor of bullish traders and supports prospects for a further intraday appreciating move for the currency 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, aka ‘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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