GBP/USD weakens below 1.3400 on easing trade tensions

GBP/USD softens around 1.3390 in Tuesday’s Asian session.
Trump said additional 100% tariffs on imports from China won’t be sustainable.
Traders brace for the UK September CPI inflation report, which will be released later on Wednesday.

Lallalit Srijandorn FXStreet

The GBP/USD pair extends the decline to near 1.3390 during the Asian trading hours on Tuesday. The US Dollar (USD) strengthens against the Pound Sterling (GBP) on easing US-China trade tensions. Traders will closely watch the UK September Consumer Price Index (CPI) inflation data, which is due later on Wednesday.

Market sentiment improved as US-China trade tensions eased after US President Donald Trump on Friday said that his proposed 100% tariff on goods from China would not be sustainable. Nonetheless, Trump blamed Beijing for the latest impasse in trade negotiation that began with Chinese authorities tightening control over rare-earth shipments.

Trump’s softened tone and his confirmation to meet Chinese President Xi Jinping provide some support to the Greenback and create a headwind for the major pair. US Treasury Secretary Bessent said the US and China will hold talks this week in Malaysia to prepare for Trump’s meeting with Xi later this month on the sidelines of the Asia-Pacific Economic Cooperation conference in South Korea.

The UK CPI data will be closely watched as it might offer some hints about whether the Bank of England (BoE) will cut interest rates again in the remaining year. Persistent inflation is a key reason for the cautious approach to further rate cuts. BoE Governor Andrew Bailey emphasized last month that the UK central bank was "not out of the woods yet" on inflation.

The headline UK CPI is expected to show a rise of 4.0% YoY in September, while the core CPI is projected to show an increase of 3.7% YoY during the same period. Any signs of persistent inflation pressures could prompt traders to scale back expectations for rate cuts and lift the Cable against the USD in the near term.

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

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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