The British Pound (GBP) extends gains for the second consecutive day on Monday, as investors cut back US Dollar (USD) long positions, amid a dovish repricing of the Federal Reserve’s (Fed) monetary policy. The pair has reached levels above Friday’s peak at 1.3561 to hit three-month highs at 1.3571 so far.
The British Pound is drawing support from broad-based US Dollar weakness, as investors come to terms with the fact that the Fed will not hike interest rates in September and probably not in the rest of the year either.
Recent US data points to a Fed hold in September
US data released last week endorsed those views. July’s Retail Sales dropped 0.6% against market expectations of a 0.1% gain, following a 0.2% increase in June. Before that, producer and consumer price figures showed moderating inflationary pressures, and Nonfarm Payrolls revealed that US jobs fell unexpectedly in July. Against this background, futures markets have slashed the odds for a September rate hike to 30%, from above 50% one week ago, according to data by the CME Group’s FedWatch Tool.
In the UK, Gross Domestic Product (GDP) data released last week confirmed moderate growth in Q2, but July’s Industrial Production fell unexpectedly, which keeps a high level of uncertainty surrounding the Bank of England’s monetary policy plans.
Strategists at UOB Group observe that the breakout of the 1.3440 -1.3540 range, while “not a more decisive break above 1.3555,” is nonetheless “sufficient to indicate that the upward bias remains intact.” Even so, they caution that “any advance is expected to face firm resistance at 1.3600,” and stress that “only a breach of 1.3495 (‘strong support’ level) would indicate that GBP is not ready to move toward 1.3600.”
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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