GBP/USD tests fresh multi-week highs ahead of Fed & BoE double-header

GBP/USD tested its highest bids in ten weeks on Monday.
The US Dollar fell across the board as investors gear up for a key Fed rate call this week.
The BoE is also due for its own interest rate decision, but no rate moves are expected.

Joshua Gibson FXStreet

GBP/USD caught another tentative bullish leg higher on Monday, testing above 1.3600 for the first time since July. The US Dollar (USD) backslid across the board to start the fresh trading week, with investors gearing up for a critical interest rate call from the Federal Reserve (Fed).

Traders will be looking to see if the Fed meets or exceeds market expectations for rate cuts through the remainder of the year when the Summary of Economic Projections (SEP), also known as the 'dot plot' of policymakers’ rate expectations, is also released during Wednesday’s rate call. Markets are betting that the Fed will deliver three rate cuts before the end of the year, with rate markets pricing in nearly 75% odds that the Fed will cut rates by 75 basis points before January, according to the CME’s FedWatch Tool.

BoE expected to stand pat, UK CPI equally unremarkable

The Bank of England (BoE) is also expected to deliver its own interest rate decision on Thursday, but the UK’s central bank is broadly expected to vote 7-to-2 in favor of keeping rates where they are for the time being. UK Consumer Price Index (CPI) inflation data is also due on Wednesday, and is expected to show a slight acceleration in inflation pressures, with annualized headline CPI inflation forecast to clock in around 3.9% YoY versus the previous period’s 3.8%. Core UK CPI inflation over the same period is expected to tick down to 3.6% from 3.8%.

US Retail Sales figures for August are due on Tuesday, but overall impacts are likely to be muted as markets keep both eyes locked on the Fed’s rate call on Wednesday. Monthly Retail Sales figures are expected to ease to 0.3% MoM from 0.5%. While markets are unlikely to react strongly, backsliding Retail Sales volumes will be the cherry on top of slumping jobs data and stubborn inflation metrics as recession fears continue to grow.

GBP/USD daily chart

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

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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