GBP/USD touches one-month peak around mid-1.2900s, seems poised to climb further

A combination of supporting factors lifts GBP/USD to a one-month top on Monday.
Diminishing odds for a September BoE rate cut continues to underpin the Sterling.
Dovish Fed expectations and a positive risk tone keep the USD bulls on the defensive.

The GBP/USD pair builds on last week's breakout momentum and climbs to over a one-month peak, around mid-1.2900s during the Asian session on Monday. The strong move up comes on the back of the recent solid bounce from the vicinity of a technically significant 200-day Simple Moving Average (SMA) and could be seen as a fresh trigger for bullish traders.

The British Pound (GBP) continues to draw support from last week's relatively stronger UK macro data, which pointed to a still resilient economy and might have dashed hopes for another interest rate cut by the Bank of England (BoE) in September. The US Dollar (USD), on the other hand, languishes near its lowest level since January touched earlier this month amid dovish Federal Reserve (Fed) expectations and turns out to be another factor acting as a tailwind for the GBP/USD pair.

Despite the fact that the markets have scaled back their bets for a more aggressive policy easing, investors seem convinced that the US central bank will begin its rate-cutting cycle in September. The expectations were reaffirmed by the latest comments by San Francisco Fed President Mary Daly, saying that the US central bank needs to take a gradual approach to lowering borrowing costs. This keeps the US Treasury bond yields depressed and weighs on the USD.

Apart from this, the prevalent risk-on environment is further holding back traders from placing any bullish bets around the safe-haven Greenback. This, in turn, validates the near-term positive outlook for the GBP/USD pair and supports prospects for an extension of a nearly two-week-old uptrend amid the absence of relevant macro data either from the UK or the US. Traders, however, might await more cues about the Fed's rate-cut path before placing aggressive directional bets.

Hence, the focus will remain on the release of the FOMC meeting minutes on Wednesday. This will be followed by the flash global PMIs on Thursday, which, along with Fed Chair Jerome Powell's speech at the Jackson Hole Symposium, will be looked upon for some meaningful impetus during the latter part of the week.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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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