Pound Sterling gains traction against softer USD; eyes US CPI report for fresh impetus

GBP/USD regains positive traction following the overnight pullback from the 1.3500 neighborhood.
A positive risk tone and easing inflationary concerns weigh on the USD, lending support to the pair.
Persistent geopolitical uncertainties could limit deeper USD losses ahead of the key US CPI report.

Haresh Menghani FXStreet

The GBP/USD pair attracts fresh buyers during the Asian session on Wednesday and stalls the previous day's retracement slide from the 1.3485 region, or over a one-week high. Spot prices currently trade around the 1.3430 region, up 0.10% for the day.

Crude Oil prices retreated sharply following a massive rally early this week and eased inflationary concerns. This, along with a generally positive tone around the equity markets, weighs on the safe-haven US Dollar (USD), which, in turn, is seen as a key factor acting as a tailwind for the GBP/USD pair.

The British Pound (GBP), on the other hand, benefits from the repricing of the Bank of England (BoE) interest rate expectations. In fact, bets for three rate cuts by the BoE have now been replaced with a roughly 70% probability of a rate hike by year-end. This offers additional support to the GBP/USD pair.

However, a further escalation of geopolitical tensions in the Middle East and economic consequences of the closure of the Strait of Hormuz could underpin the USD's global reserve currency status. This might hold back traders from placing aggressive bullish bets around the GBP/USD pair and cap the upside.

Despite US President Donald Trump's remarks that the war could be over soon, the fighting showed no signs of slowing down. The Israel Defense Forces said that it had unleashed a new wave of strikes on Iran, and launched more missiles at Lebanon, targeting infrastructure that belongs to Iran-backed Hezbollah.

This might keep a lid on any optimism in the markets and help limit deeper USD losses. Traders might also opt to wait for the release of the latest US consumer inflation figures before placing fresh directional bets. Nevertheless, the broader fundamental backdrop seems tilted in favor of the GBP/USD bulls.

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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