The GBP/USD pair trades in positive territory around 1.3610 during the early European trading hours on Thursday. The US Dollar (USD) weakens against the British Pound (GBP) on fading Federal Reserve (Fed) rate hike expectations and Treasury bond buybacks. The US Initial Jobless Claims report is due later on Thursday.
A disappointing US jobs report and softer inflation data dialed back bets of tighter Fed monetary policy, undermining the Greenback. The chance of a US rate hike in September has dropped to 32.7%, down from 47% a month earlier, according to the CME FedWatch Tool.
The Federal Reserve’s (Fed) latest July meeting minutes indicated many policymakers saw rate hikes as likely if inflation did not decline. The Fed decided to keep the Federal Funds Rate targeted in a range between 3.5%-3.75% last month, with dissenters focusing on the need for action soon to return inflation to target.
The Bank of England (BoE) is likely to be reassured by the lack of surprises in Wednesday’s UK Consumer Price Index (CPI) inflation data, and figures a day earlier showed a slightly cooler labour market, which may limit the lasting impact of inflation caused by the Iran war.
Money market pricing shows City economists project one BoE rate hike by the end of the year, which would lift the Bank rate from 3.75% to 4.0%.
UK labour data reinforces picture of easing inflation risks
Analysts at MUFG note that the latest labour figures, released after yesterday’s employment report, showed “slightly stronger headline wage growth” but a further moderation in underlying pay pressures, with “private sector ex-bonus earnings increase slowed from 2.9% to 2.8%.” They highlight that “demand for labour [is] still weak (PAYE employment fell 13k),” and argue that taken together, the numbers “still paint a picture of easing inflationary risks coming from the UK labour market.”
Technical Analysis: Constructive outlook of GBP/USD remains intact
In the daily chart, GBP/USD holds a bullish near-term tone as spot remains above both the 20-period Bollinger middle band and the 100-day simple moving average (SMA). The pair is pressing into the upper half of the recent volatility envelope, with the Bollinger upper band acting as immediate topside resistance, while the Relative Strength Index (RSI) at 68.7 flirts with overbought territory, hinting that upside momentum is strong but increasingly stretched.
On the downside, initial support emerges at the August 18 low of 1.3519. The next contention level is seen at the Bollinger middle band around 1.3465, reinforced by the 100-day SMA at 1.3425 just below, forming a nearby demand cluster before deeper support at the lower Bollinger band near 1.3290.
On the topside, a clear break above the 1.3645 Bollinger upper band would open the door for the 1.3700 psychological level. The next hurdle to watch is the January 27 high of 1.3869.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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