GBP/USD holds positive ground above 1.2850, focus on Fed/BoE rate decision this week
|- GBP/USD trades in positive territory for the second consecutive day near 1.2885 in Monday’s Asian session.
- The US Fed is expected to hold its interest rate at its July meeting on Wednesday.
- The markets see a 50% chance of a quarter-point rate cut by the BoE on Thursday.
The GBP/USD pair holds positive ground around 1.2885 during the Asian trading hours on Monday. The uptick of the pair is bolstered by the softer US Dollar (USD) amid the hope of an interest rate cut by the Federal Reserve (Fed) in September. The Fed and Bank of England (BoE) monetary policy meetings on Wednesday and Thursday will be closely watched events.
Most analysts and traders expect the Fed to leave the interest rate unchanged at its next meeting on Wednesday. The US Fed might signal this week that interest rate cuts are on the way, although it is widely anticipated to hold steady until its next rate decision in September. Investors are now seeing that the first rate cut will come by mid-September, pricing in 100% of the Fed rate cut by at least a quarter-percentage-point by then, according to data from the CME FedWatch Tool.
Traders will also closely monitor the FOMC press conference for fresh impetus. The dovish tone from the FOMC might undermine the Greenback and create a tailwind for GBP/USD.
On the GBP’s front, the BoE might cut interest rates at its August meeting on Thursday, the first-rate cut since 2020. The markets forecast 50% odds of a quarter-point rate cut on Thursday, although views are split on whether the cut will occur now or at the next meeting in September.
Pound Sterling FAQs
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, aka ‘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).
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.
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.
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.
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