Pound holds its floor as BoE member Greene presses for a hike

GBP/USD bounced a few pips above its three-month low on BoE hike talk.
BoE member Greene sees UK pay deals near 3.5%, too fast for 2% inflation.

Joshua Gibson FXStreet

Bank of England (BoE) external member Greene said in Cape Town that it's dangerous to assume markets will do the BoE's work for it, and that UK pay awards look set for about 3.5% next year. She has voted for a hike at each of the last three meetings. Governor Bailey has argued that higher borrowing costs since the US-Iran war began have given the BoE time to decide, which is the argument she called dangerous.

Traders price about an 83% chance that the UK's Bank Rate rises to 4.00% from 3.75% on November 5, against roughly one in five for a Fed hike on October 28. A BoE move first would put the Bank Rate level with the top of the Fed's 3.75%-4.00% range and erase the extra interest a Dollar deposit earns over a Pound one.

GBP/USD dipped just under 1.3200 before Governor Bailey's speech in Istanbul, a few pips short of the three-month low set on October 1. It turned up after the speech and reached just under 1.3250 as the Dollar slipped from near its 18-month high, then closed in the upper third of the day's range.

Every daily low since September 24 has come within about 30 pips of 1.3200, and every high in that run has stopped below 1.3300 apart from a brief spike above it on September 30. The pair has traded under its 50-day and 200-day Exponential Moving Averages (EMAs), trend lines built from past closing prices, since mid-September.

The BoE has seven speeches scheduled between October 12 and October 16, ending with Governor Bailey, and each will test the 83% priced for November. Before them, Friday's University of Michigan (UoM) survey carries US households' one-year inflation expectations, 4.6% in September, and a higher reading could lift the odds of an October Fed hike.

US Consumer Price Index (CPI) data follows on Wednesday, October 14, and UK Gross Domestic Product (GDP) for August on Thursday, October 15.

A firm US inflation number could put the three-month low back in reach, while a soft one may leave November's BoE hike as the only move priced with much confidence before December.

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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