- GBP/USD edges lower to 1.2980 in Tuesday’s early Asian session.
- Dovish comments from Fed officials might weigh on the USD and cap the pair’s downside.
- Fed’s Bostic and Barr are set to speak later on Tuesday.
The GBP/USD pair weakens near 1.2980, snapping the three-day winning streak during the early European session on Tuesday. The modest recovery of the Greenback drags the major pair lower. In the absence of top-tier data releases from the UK later this week, the USD price dynamic will be the main driver for the GBP/USD. All eyes will be on the Federal Reserve (Fed) Chair Jerome Powell's speech on Friday.
The UK inflation and employment reports last week supported the Bank of England (BoE) to keep the interest rate steady at 5.0% at the upcoming September meeting. IBOSS chief economist, Rupert Thompson, noted, “The BOE is most likely to leave rates unchanged at their next meeting in September, with the next cut having to wait until November.” The expectation of more rate cuts by the BoE might weigh on the Pound Sterling (GBP) in the near term.
However, the upside of the US Dollar (USD) might be capped amid the dovish stance of the Fed officials. Minneapolis Fed President Neel Kashkari stated on Monday that he would be open to cutting US interest rates in September because of the rising possibility that the labor market weakens too much.
Meanwhile, Chicago Fed President Austan Goolsbee said on Sunday that the US economy does not show signs of overheating, therefore, Fed officials should be vigilant about keeping restrictive policy in place longer than necessary. According to the CME FedWatch Tool, traders have priced in around 77% odds of a 25 basis points (bps) Fed rate cut in its September meeting. Later on Tuesday, investors will take more cues from the Fed’s Raphael Bostic and Michael Barr speeches. Any dovish comments of Fed officials could undermine the USD and help limit losses for 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, 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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