British Pound gains as Andy Burnham to become new Prime Minister
- GBP/USD rises as UK 10-year yields hit 5% on oil inflation, reinforcing expectations of prolonged BoE rate hikes.
- Markets watch PM Andy Burnham take office, reassured by Shabana Mahmood's potential Chancellor appointment easing fiscal expansion fears.
- The US Dollar weakens as markets expect the Fed to keep interest rates steady at its upcoming meeting.
GBP/USD gains ground after two days of losses, trading around 1.3470 during the European hours on Monday. The pair strengthens as the UK 10-year gilt yield held near 5%, driven by surging oil prices that stoked inflation fears and signaled that the Bank of England (BoE) may keep interest rates elevated for longer.
Meanwhile, market attention turned to Downing Street as Andy Burnham assumed office as Prime Minister on Monday. Investors were further reassured by reports positioning Shabana Mahmood as the leading candidate for Chancellor, easing concerns over overly aggressive fiscal expansion.
Additionally, the GBP/USD pair appreciates as the US Dollar (USD) loses ground, which could be attributed to the market expectations that the Federal Reserve will keep interest rates steady at its upcoming meeting. However, market pricing via the CME FedWatch Tool now reflects a 61.4% probability of a rate hike in September.
The Greenback may regain its ground on increased risk aversion amid escalating hostilities between the United States (US) and Iran. The US has launched its ninth consecutive night of strikes against Iranian targets. In response, Iranian officials declared that the ceasefire between the two nations has been effectively abandoned, opening the door for deepening disruptions to crucial energy pathways through the region's narrow waterways.
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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