- GBP/USD trades on a softer note near 1.2895 in Wednesday’s early Asian session.
- Majority of economists anticipate the BoE to cut the bank rate at its August meeting next week.
- Investors await the preliminary US Q2 Gross Domestic Product, which is due on Thursday.
The GBP/USD pair edges lower to 1.2895 during the Asian trading hours on Thursday. The higher possibility that the Bank of England (BoE) will begin cutting interest rates in August has undermined the Pound Sterling (GBP). In the absence of top-tier UK economic data releases, the GBP/USD pair will be influenced by the USD. The release of preliminary US Gross Domestic Product (GDP) for the second quarter (Q2) will be in the spotlight.
The majority of economists said in a Reuters poll that the BoE is expected to cut the bank rate to 5% at its August meeting next week. JP Morgan analyst, Allan Monks, noted that "we look for a 25 basis point rate cut at next week's meeting, although the call appears much closer than it did several weeks back. The case for lower rates is far from clear.”
On the USD’s front, market players anticipate the US Federal Reserve (Fed) to keep rates unchanged at its July meeting next week, but forecast the US central bank to start easing its monetary policy in September, pushing the Federal Funds Rate to the 5.00%-5.25% range.
However, investors will take more cues from the key US economic data this week for fresh impetus. On Wednesday, the release of US preliminary S&P Global PMIs for July could affirm the rate outlook. The Manufacturing PMI is projected to improve to 51.7 in July from 51.6 in June, while the Services PMI is forecast to ease slightly to 54.4 in July from 55.3. Later this week, the first reading of the US second-quarter Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) Price Index data for June will be published.
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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