GBP/USD depreciates toward 1.2700 due to increased risk-off mood, BoE rate cut
- GBP/USD loses ground following the BoE’s decision to deliver a 25-basis point rate cut.
- BoE Governor Andrew Bailey noted that the overall inflation trajectory is closer to the 2% target compared to the median forecast.
- The recent US PMI data have created a complex situation, highlighting an economic slowdown and increased odds for a Fed rate cut.
GBP/USD extends its losses following the Bank of England‘s (BoE) decision to deliver a broadly expected 25-basis point rate cut at its August meeting held on Thursday. The GBP/USD pair trades around 1.2720 during the Asian session on Friday.
BoE Governor Andrew Bailey explained the decision to reduce the policy rate to 5% and addressed media questions. Bailey noted that the increase in the minimum wage has not been detrimental from their viewpoint. According to Bailey, while firms often cite higher minimum wages as compressing pay scales, the overall inflation trajectory, including upside risks, is now closer to the 2% target compared to the median forecast.
The US Dollar (USD) may advance against its peers due to increased risk aversion. Recent manufacturing and labor market data have erected a complex situation involving an economic slowdown in the United States (US) and increased expectations for a Federal Reserve rate cut. If the economic downturn becomes too severe, it could negatively impact market sentiment, rendering any rate cuts from the Fed irrelevant.
US ISM Manufacturing Purchasing Managers Index (PMI) tumbled to an eight-month low of 46.8 in July, compared to the previous 48.5 reading and the forecasted move up to 48.8. US Initial Jobless Claims for the week ended July 26 rose to 249K from the previous week’s 235K, exceeding the forecast uptick to 236K.
The CME's FedWatch Tool shows that traders are fully anticipating a 25-basis point rate cut on September 18. Traders are likely to closely watch the upcoming July US Nonfarm Payrolls and Average Hourly Earnings data, set to be released later in the North American session, for insights into the US labor market.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
