GBP/USD edges higher above 1.3200 as Fed rate cut bets pressure US Dollar
- GBP/USD gains ground to around 1.3235 in Wednesday’s early European session.
- Rising December Fed rate cut bets continue to undermine the US Dollar.
- Dovish BoE expectations might cap the upside for the major pair.
The GBP/USD pair gains traction to near 1.3235 during the early European session on Wednesday. The US Dollar (USD) remains weak against the Pound Sterling (GBP) amid growing expectations that the US Federal Reserve (Fed) will deliver a 25 basis points (bps) interest rate cut at its upcoming meeting next week.
Hopes for a December Fed rate reduction provide some support to the Greenback. Anticipation for a December cut has risen following dovish comments from Fed officials and recent signs of a cooling economy. According to the CME FedWatch Tool, there is nearly an 89% chance of a quarter-point rate cut at next week's meeting.
Additionally, US President Donald Trump announced that he plans to name a new Fed chair in early 2026. Bloomberg reported earlier this week that Kevin Hassett is at the top of the list of potential candidates to succeed Jerome Powell as US Fed Chair. Hassett's nomination could weigh on the USD as he is seen as the most dovish candidate.
On the UK’s front, softer inflation, a cooling labor market, and the Autumn November budget have reinforced bets for a December rate cut from the Bank of England (BoE). UK Prime Minister Keir Starmer emphasized the need to bring inflation and interest rates down to boost business investment and economic growth. A majority of analysts expect the UK central bank to cut interest rates to 3.75% in December, with markets pricing in a 90% chance. This, in turn, could act as a headwind for the major pair.
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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