GBP/USD consolidates below mid-1.2900s; downside potential seems limited
- GBP/USD struggles to gain any meaningful traction on Monday amid mixed fundamental cues.
- A bearish USD lends support to the pair, though Friday’s dismal UK GDP print caps the upside.
- Traders also seem reluctant to place aggressive bets ahead of the Fed/BoE meetings this week.
The GBP/USD pair kicks off the new week on a subdued note and oscillates in a narrow trading band, around the 1.2930 region during the Asian session. The fundamental backdrop, however, warrants some caution before positioning for any meaningful corrective pullback for spot prices from a four-month peak, around the 1.2990 area touched last Wednesday.
The US Dollar (USD) languishes near a multi-month low amid worries that US President Donald Trump's tariffs and retaliatory measures from other countries could hurt the US economy. Adding to this, softer then expected US inflation and signs of cooling US labor market might force the Federal Reserve (Fed) to cut interest rates several times this year. This, in turn, keeps the USD bulls on the defensive and acts as a tailwind for the GBP/USD pair.
The bets for further policy easing by the Fed were reaffirmed by the University of Michigan Surveys released on Friday, which showed that Consumer Sentiment Index plunged to a nearly 2-1/2-year low in March. Moreover, inflation expectations soared amid worries that Trump's aggressive economic policies would boost prices. Apart from this, a generally positive tone around the Asian equity markets is seen undermining the safe-haven Greenback.
The British Pound (GBP), on the other hand, struggles to lure buyers in the wake of Friday's dismal domestic data, which showed that the UK economy unexpectedly contracted by 0.1% in January. Investors, however, seem convinced that the Bank of England (BoE) will cut rates more slowly than other central banks, including the Fed. This, in turn, favors the GBP bulls and suggests that the path of least resistance for the GBP/USD pair is to the upside.
Traders now look to the US economic docket, featuring the release of monthly Retail Sales and the Empire State Manufacturing Index, for some impetus later during the North American session. The focus, however, will remain glued to the key central bank event risks – the outcome of the highly-anticipated two-day FOMC monetary policy meeting on Wednesday, which will be followed by the BoE policy meeting on Thursday.
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
