GBP/USD strengthens above 1.3100 as September Fed rate cut bets remain in play

GBP/USD holds positive ground near 1.3135 in Monday’s early Asian session.
Fed rate cut expectations continue to undermine the US Dollar.
The BoE is expected to cut one more 25 bps for the remaining year, according to a Reuters poll.

Lallalit Srijandorn FXStreet

The GBP/USD pair gains ground around 1.3135, snapping the three-day losing streak during the early Asian session on Monday. In the absence of top-tier economic data releases from the UK this week, the USD price dynamic will be the main driver for the GBP/USD. The US Nonfarm Payrolls (NFP) for August will take center stage on Friday.

The US Federal Reserve (Fed) easing expectations remain weigh on the Greenback. Fed Chair Jerome Powell last week signalled that a rate cut was imminent, citing labor market concerns. According to the CME FedWatch tool, traders are now pricing in a nearly 70% of the 25 basis points (bps) rate cut by the Fed in September, while the odds of a 50 bps reduction stand at 30%.

The key US employment data on Friday will help determine whether the US Dollar (USD) recovery can continue. The US economy is expected to see 163K job additions in August, while the Unemployment Rate is expected to tick lower to 4.2%. Average Hourly Earnings are projected to rise to 0.3% MoM in August. In case of weaker-than-expected outcomes, this could raise concern about an economic slowdown in the US economy and drag the Greenback lower.

On the other hand, investors are gaining confidence that the policy-easing cycle by the Bank of England (BoE) will be gradual in the remainder of the year, which might lift the Pound Sterling (GBP). Economists anticipate one more 25 basis points (bps) rate cut from the BoE this year, according to a Reuters poll.

(This story was corrected on September 2 at 09:40 GMT to say that Average Hourly Earnings are projected to rise to 0.3% in August, not July.)

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro 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 then its currency will gain in value 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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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