GBP/USD gathers strength above 1.3500 as BoE signals gradual easing
- GBP/USD strengthens to around 1.3510 in Wednesday’s early European session.
- The BoE interest rate is likely to continue on a gradual downward path.
- Traders brace for the US Initial Jobless Claims report later on Wednesday.
The GBP/USD pair trades in positive territory near 1.3510 during the early European session on Wednesday. The Pound Sterling (GBP) strengthens against the Greenback on expectations that the Bank of England (BoE) will follow a gradual monetary easing path in 2026.
The UK central bank delivered a widely expected rate cut to 3.75% last week, but suggested that the bar for further reduction was high, given persistent inflation. Rising bets of a slower BoE monetary easing path could provide some support to the Cable against the US Dollar (USD) in the near term. Money markets believe the BoE will deliver at least one rate cut in the first half of the year, and pricing in nearly a 50% probability of a second before the year-end, according to Reuters.
On the other hand, the stronger-than-expected US economic data could underpin the USD and act as a headwind for the major pair. Data released by the Bureau of Economic Analysis on Tuesday revealed that the US Gross Domestic Product (GDP) grew at a 4.3% annualized pace in the third quarter (Q3). This reading came in above the market consensus of 3.3% and followed 3.8% growth in Q2.
Financial markets are likely to remain quiet ahead of the Christmas holiday. Traders will take more cues from the US Initial Jobless Claims data later in the day. The market consensus was for 223,000 initial jobless claims for the week ending December 13, compared to 224,000 in the previous reading.
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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