The GBP/USD pair is seen consolidating its weekly losses registered over the past three days and oscillating in a narrow range near a four-week trough, touched during the Asians session on Thursday. Spot prices currently trade just below the 1.3500 psychological mark and seem vulnerable to slide further.
The British Pound (GBP) continues with its relative underperformance on the back of rising bets that the Bank of England (BoE) will cut interest rates at its next policy meeting in March. The expectations were reaffirmed by the disappointing UK jobs report and a fall in the UK consumer inflation to its lowest level in nearly a year. This, along with a bullish US Dollar (USD), validates the near-term negative outlook for the GBP/USD pair.
The January FOMC meeting Minutes released on Wednesday showed that policymakers were deeply divided over the necessity and timing of further interest rate cuts amid concerns over still sticky inflation. In fact, several Federal Reserve (Fed) officials indicated that more rate cuts could be warranted if inflation declines as expected, while others cautioned that easing too early could compromise the central bank’s 2% inflation target.
Meanwhile, reports that the US military is prepared to strike Iran as early as this weekend keep geopolitical risks in play, assisting the safe-haven Greenback in preserving the overnight strong gains to over a one-week high. This further backs the case for an extension of the GBP/USD pair’s weekly downtrend, suggesting that any attempted recovery might now be seen as a selling opportunity and runs the risk of fizzling out rather quickly.
Traders now look to Thursday’s US economic docket – featuring the release of Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, and Pending Home Sales data. Apart from this, speeches from influential FOMC members will drive the USD and the GBP/USD pair later during the North American session. The focus, however, will remain glued to the US Personal Consumption Expenditure (PCE) Price Index, due on Friday.
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.
