- GBP/USD gathers strength near 1.3105 in Friday’s early European session.
- Fed’s Collins said it will soon be appropriate to start cutting rates as data amid progress on inflation.
- The first reading of UK August PMI data came in stronger than expected, pushing back the expectation of a BoE rate cut.
The GBP/USD pair trades in positive territory for the seventh consecutive day near 1.3105 during the early European session on Friday. The confidence of investors that the US Federal Reserve (Fed) will start easing monetary policy in the upcoming September meeting continues to undermine the US Dollar (USD) broadly.
The Bank of England (BoE) Governor Andrew Bailey and Fed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday will be in the spotlight and might give a clearer direction about the interest rate path. The minutes of the July 30-31 FOMC meeting showed that the majority of Fed policymakers backed the case for a rate cut next month amid progress in bringing down inflation to the target. On Thursday, Boston Fed President Susan Collins said that it will soon be appropriate to start cutting rates as data on inflation are consistent with more confidence inflation getting back to 2%.
On the other hand, investors slightly pushed back their expectations on a Bank of England (BoE) interest rate cut in September after the upbeat Purchasing Managers' Index (PMI) reports. This, in turn, further boosts the Pound Sterling (GBP) against the Greenback. Data released by the Chartered Institute of Procurement & Supply and S&P Global on Thursday showed that preliminary UK Composite PMI beat the estimation, jumping to 53.4 in August from 52.8 in July.
Meanwhile, Manufacturing PMI rose to 52.5 in August versus 52.1 prior, better than the 52.1 expected. The Services figure climbed to 53.3 in the same month from 52.5 in July, above the consensus of 52.8. The markets are now pricing in less than 30% odds of a BoE September rate cut after Thursday's PMI data.
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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