British Pound drifts lower below 1.3500 as Fed hike bets rise, UK jobs data loom
- GBP/USD softens to near 1.3490 in Tuesday’s early Asian session.
- Fed is likely to raise interest rates by 25 bps at its policy meeting on Wednesday.
- BoE is expected to keep rates steady at 3.75% on Thursday.
The GBP/USD pair loses momentum to around 1.3490 during Asian trading hours on Tuesday. Expectations of a US Federal Reserve (Fed) interest rate hike on Wednesday provide some support to the US Dollar (USD) against the British Pound (GBP). The UK jobs report is due on Tuesday. Attention will shift to the Bank of England (BoE) interest rate decision on Thursday.
After the US inflation report on Friday, which showed core Consumer Price Index (CPI) rose by a higher-than-expected 0.3% in August, traders are more convinced the Fed will raise interest rates to address sticky inflation.
Traders are now pricing in about a 92.4% chance of a rate hike at the central bank’s September policy meeting, up from about 67% before the CPI data last week, according to the CME FedWatch Tool.
Fed Chairman Kevin Warsh will hold a press conference following the conclusion of the two-day Federal Open Market Committee (FOMC) meeting on Wednesday. Any dovish remarks from policymakers could drag the Greenback lower and act as a tailwind for the major pair. On the other hand, hawkish comments from Fed officials could lift the USD in the near term.
On the other hand, the BoE is set to keep interest rates steady on Thursday despite surging oil prices. Governor Andrew Bailey said last week the central bank had no "secret plan" to raise interest rates this year, unless the ongoing climb in oil prices driven by the war in the Middle East translated into more lasting domestic price pressures.
Financial markets are pricing in a 30% probability of a quarter-point rate hike on Thursday, according to LSEG data on Monday, up from less than 10% at the start of last week, and almost fully pricing in a November move.
UK data-heavy week underpins Pound as UK-US yield spreads climb
Strategists at Scotiabank highlight that the coming days bring a “relatively heavy” UK data calendar, with “Tuesday’s jobs and Wednesday’s CPI ahead of the central bank decision, followed by retail sales on Friday.” They argue that “fundamentals remain supportive as we note the clear uptrend in UK-US yield spreads since early July,” underscoring that this widening spread continues to back the Pound’s performance.
According to Scotiabank, “political developments have been limited despite high profile coverage of UK plans for potentially higher taxes on banks,” with the main “medium-term risk event” identified as the fall budget “scheduled for October 28.”
Technical Analysis: GBP/USD retains a neutral outlook in the near term
In the daily chart, GBP/USD holds a neutral near-term tone as it trades between the 20-day Bollinger middle band as overhead resistance and a cluster of supports formed by the 20-day lower band and the 100-day moving average. The Relative Strength Index (14) hovers just below the 50 line, hinting at subdued directional momentum while price consolidates within the Bollinger envelope.
On the topside, a clear move above the Bollinger middle band at 1.3557 would expose the upper band near 1.3660 as the next resistance hurdle. On the downside, initial support is seen just under the market around 1.3455 at the lower Bollinger band, followed by the 100-day moving average at 1.3445; a break below this zone would tilt the bias back toward the bears.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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