GBP/USD gains ground above 1.3400 on UK PMI optimism
- GBP/USD gathers strength to near 1.3425 in Wednesday’s early Asian session.
- The UK PMI showed an improvement in the private sector for December, supporting the Pound Sterling.
- A median Fed official forecasted just one additional rate cut in 2026.
The GBP/USD pair gains momentum to around 1.3425 during the early Asian session on Wednesday. The Pound Sterling (GBP) edges higher against the Greenback on the upbeat UK preliminary S&P Global Purchasing Managers' Index (PMI) data. Traders will take more cues from the Fedspeak later on Wednesday.
Data released by S&P Global on Tuesday showed that the UK Composite PMI came in at 52.1, versus estimates of 51.4 and the previous reading of 51.2. The Services and the Manufacturing PMI jumped to 52.1 and 51.2, respectively. Both figures came in above the market consensus. The improvement in the UK’s dominant services sector added to the positive tone and provided some support to the GBP against the US Dollar (USD).
Nonetheless, expectations of a Bank of England (BoE) interest rate cut on Thursday might cap the upside for the Cable. Markets are widely anticipating the UK central bank to reduce its key bank rate by 25 basis points (bps) to 3.75% at its December meeting.
"We continue to think the BoE will cut faster than markets currently price, with the Bank Rate declining to 3% by the end of 2026. The PMI data does not change that view," said Jefferies economist Modupe Adegbembo.
Federal Reserve (Fed) officials are split over whether more easing of monetary policy is needed next year. The median Fed official penciled in just one reduction in 2026, but some policymakers see no further cuts. Meanwhile, traders anticipate two rate cuts next year. Fed funds futures are pricing an implied 75.6% chance of a hold in rates at the US central bank's next meeting in January, up from nearly 70% a week ago, according to the CME FedWatch tool.
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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