GBP/USD trades with positive bias above 1.3500; modest USD strength caps gains

GBP/USD draws support from the divergence in BoE-Fed policy expectations.
A modest USD uptick caps gains ahead of the final UK Manufacturing PMI.
Trades also seem reluctant ahead of this week’s important US macro data.

Haresh Menghani FXStreet

The GBP/USD pair kicks off the new week on a positive note and holds steady above the 1.3500 psychological mark during the Asian session. Moreover, the fundamental backdrop suggests that the path of least resistance for spot prices is to the upside.

The Bank of England's (BoE) cautious rate cut last month marks a big divergence in comparison to the growing acceptance that the Federal Reserve (Fed) will lower borrowing costs at least twice by the end of this year. This, in turn, has been a key factor behind the British Pound's (GBP) relative outperformance against its American counterpart and validates the near-term positive outlook for the GBP/USD pair.

However, a modest US Dollar (USD) uptick could act as a headwind for the currency pair. Traders also seem reluctant and opt to wait for this week's important US macro data scheduled at the start of a new week to confirm the next leg of a directional move. Hence, it will be prudent to wait for some follow-through buying before placing fresh bullish bets around the GBP/USD pair and positioning for any further appreciation.

Market participants now look to the release of the final UK Manufacturing PMI for some impetus amid thin liquidity on the back of the Labor Day holiday in the US. Meanwhile, the focus will remain glued to the closely-watched US monthly employment details on Friday. The popularly known Nonfarm Payrolls (NFP) report will play a key role in influencing the USD price dynamics and driving 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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