GBP/USD remains depressed below mid-1.2600s amid modest USD strength
|- GBP/USD struggles to lure buyers on weaker UK retail sales and a modest USD uptick.
- Expectations that the Fed will keep rates higher for a longer period underpin the buck.
- Reduced bets for another BoE rate cut in December help limit the downside for the pair.
The GBP/USD pair remains on the defensive through the Asian session on Tuesday, albeit it lacks follow-through selling and currently trades just below mid-1.2600s.
The British Retail Consortium (BRC) reported earlier today that sales volumes dropped by 3.3% in the 12 months to November. This marks the weakest reading since April and was significantly influenced by the timing of Black Friday sales. Nevertheless, the data still points to weakening consumer confidence and undermines the British Pound (GBP). This, along with a modest US Dollar (USD) uptick, is seen acting as a headwind for the GBP/USD pair.
The USD Index (DXY), which tracks the Greenback against a basket of currencies, looks to build on the overnight bounce from a nearly three-week low amid bets that the Federal Reserve (Fed) will keep rates high for a longer period. Investors seem worried that US President-elect Donald Trump's tariff plans would trigger global trade wars. Moreover, Trump's expansionary policies could boost inflation and limit the scope for the Fed to ease its policy further.
Apart from this, persistent geopolitical tensions stemming from the worsening Russia-Ukraine war further benefit the safe-haven buck and weigh on the GBP/USD pair. Meanwhile, traders have been scaling back their bets for another interest rate cut by the Bank of England (BoE) this year after data released last week showed that the underlying price growth in the UK gathered speed in October. This, in turn, helps limit the downside for the currency pair.
Traders also seem reluctant and opt to wait on the sidelines ahead of important US macro releases scheduled at the beginning of a new month, including the closely watched Nonfarm Payrolls (NFP) report. Apart from this, Fed Chair Jerome Powell's speech should provide cues about the future rate-cut path and drive the USD demand. In the meantime, Tuesday's release of JOLTS Job Openings data could produce short-term opportunities around the GBP/USD pair.
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, 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).
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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