GBP/USD gathers strength above 1.3450 on Fed rate cut bets, BoE's gradual policy path
- GBP/USD edges higher to near 1.3480 in Friday’s early Asian session.
- Traders believe more USD weakness is coming if the next Fed Chair opts for deeper interest-rate cuts as anticipated.
- The BoE expects rates to continue on a gradual downward path, but each subsequent cut will be a "closer call."
The GBP/USD pair gathers strength to around 1.3480 during the early Asian session on Friday. Expectations of the US Federal Reserve (Fed) rate cuts this year weigh on the US Dollar (USD) against the Pound Sterling (GBP). Philadelphia Fed President Anna Paulson is set to speak later on the weekend.
The Greenback ended 2025 with the sharpest annual decline in eight years. With at least two rate reductions priced in for this year, the Fed's policy path diverges from the United Kingdom (UK), dimming the USD's appeal. Financial markets are pricing in nearly a 15.0% chance the Fed will cut interest rates at its next meeting in January, according to the CME FedWatch tool.
Furthermore, anticipations that US President Donald Trump will name a dovish successor to Fed Chair Jerome Powell, whose term ends this year, might contribute to the USD’s downside. Trump stated that he expects the next Fed Chairman to keep interest rates low and never “disagree” with him. The comments are likely to heighten concerns among investors and policymakers about Fed independence.
On the other hand, the Bank of England (BoE) expects rates to continue on a gradual downward path, which provides some support to the Cable. The UK central bank reduced interest rates from 4.0% to 3.75% at its December policy meeting, the lowest level in nearly three years. Governor Andrew Bailey said during the press conference that rates are likely to continue on a gradual downward path, but "how much further we go becomes a closer call" with each cut.
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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