- GBP/USD marked its 31-month high level of 1.3359, recorded on Monday.
- The US Dollar receives downward pressure due to dovish Fedspeak.
- UK Prime Minister Starmer has voiced concerns that the domestic economy could be heading toward “painful” economic reforms.
GBP/USD extends its winning streak for the fifth consecutive session, trading around 1.3350 during the Asian hours on Tuesday. The pair maintains its position near its 31-month high level of 1.3359, recorded on Monday.
The US Dollar (USD) may depreciate due to increasing expectations for further rate cuts by the US Federal Reserve (Fed) in 2024. According to the CME FedWatch Tool, markets are pricing in a 50% likelihood of a 75 basis point reduction, bringing the Fed's rate to a range of 4.0-4.25% by the end of this year.
Minneapolis Fed President Neel Kashkari said on Monday that he believes there should be and will be additional interest rate cuts in 2024. However, Kashkari expects future cuts to be smaller than the one from the September meeting. Additionally, Chicago Fed President Austan Goolsbee noted, “Many more rate cuts are likely needed over the next year, rates need to come down significantly,” per Reuters.
On the data front, the S&P Global US Composite PMI grew at a slower rate in September, registering 54.4 compared to 54.6 in August. The Manufacturing PMI unexpectedly dropped to 47.0, indicating contraction, while the Services PMI expanded more than anticipated, reaching 55.4, data showed on Monday.
In the United Kingdom (UK), the preliminary UK Manufacturing Purchasing Managers' Index (PMI) fell to 51.5 in September, down from 52.5 in August, missing the market expectation of 52.3. Similarly, the Services PMI declined to 52.8 in September from 53.7 in August, also below the market forecast of 53.5.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated, “A slight cooling of output growth across manufacturing and services in September should not be viewed as overly concerning.”
UK Prime Minister Keir Starmer has expressed concerns that the domestic economy may be on a collision course with “painful” economic reforms, particularly as UK inflation figures remain significantly stickier than those in other countries.
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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