- GBP/USD gains some positive traction and snaps a five-day losing streak to a multi-week low.
- A modest USD downtick lends support to the pair, though a combination of factors caps gains.
- Diminishing odds for an aggressive Fed policy easing limit the USD losses and act as a headwind.
The GBP/USD pair attracts some buyers during the Asian session on Tuesday and for now, seems to have snapped a five-day losing streak to a nearly four-week low, around the 1.3060 area touched the previous day. Spot prices, however, struggle to build on the uptick beyond the 1.3100 mark, warranting some caution for bullish traders.
The US Dollar (USD) remains depressed below a seven-week high touched on Friday and turns out to be a key factor lending some support to the GBP/USD pair. That said, reduced bets for another oversized interest rate cut by the Federal Reserve (Fed), amid signs of a still resilient US labor market, might hold back the USD bears from placing aggressive bets. Apart from this, a softer risk tone should act as a tailwind for the safe-haven buck and cap the upside for the currency pair.
Investors remain concerned that Middle East tensions could turn into a wider conflict. Furthermore, not-so-optimistic comments by the National Development and Reform Commission (NDRC) overshadow the recent optimism led by China's stimulus bonanza and tempers investors' appetite for riskier assets. This is evident from a generally weaker tone around the equity markets, which, in turn, could drive some haven flows towards the USD and keep a lid on the GBP/USD pair.
Meanwhile, the Bank of England (BoE) Governor Andrew Bailey said last week that there was a chance that the central bank could become a bit more aggressive in cutting rates if there's further good news on inflation. This might further contribute to capping gains for the British Pound (GBP) and suggests that the path of least resistance for the GBP/USD pair is to the downside. Hence, any further move up might still be seen as a selling opportunity and runs the risk of fizzling out quickly.
Moving ahead, there isn't any relevant market-moving economic data due for release on Tuesday, either from the UK or the US, leaving the USD and the GBP/USD pair at the mercy of Fedspeak. The focus, meanwhile, remains glued to the release of the FOMC meeting minutes on Wednesday. This will be followed by the US Consumer Price Index (CPI) and the Producer Price Index (PPI), which will play a key role in driving the USD demand and provide a fresh impetus to the currency pair.
(This story was corrected on October 8 at 06:08 GMT to say that GBP/USD snapped a five-day losing streak to the 1.3060 area, not 1.3560)
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.
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