Pound Sterling faces pressure on UK GDP growth remaining stagnant in August
- The Pound Sterling drops against its major currency peers after weak UK GDP and factory data for July.
- UK GDP growth remained stagnant in August, as expected.
- US weekly Initial Jobless Claims ending September 5 came in significantly higher at 263K.
The Pound Sterling (GBP) faces selling pressure against its major currency peers on Friday after the release of the UK Gross Domestic Product (GDP) and factory data for July. The United Kingdom (UK) Office for National Statistics (ONS) reported that the economy remained stagnant in July, as expected, after rising by 0.4% in June.
Growing UK economic concerns are likely to force traders to raise bets supporting more interest rate cuts by the Bank of England (BoE) in the remainder of the year. Currently, there is a 33% chance that the BoE will reduce borrowing rates one more time this year, according to Reuters.
For fresh cues on the interest rate outlook, investors will pay close attention to the BoE’s monetary policy announcement on Thursday, in which the central bank is expected to keep borrowing rates steady at 4%. In its August monetary policy, the BoE lowered interest rates by 25 basis points (bps) and guided a “gradual and careful” monetary expansion guidance.
Meanwhile, month-on-month Manufacturing Production has declined by 1.3%, while it was expected to remain flat after rising by 0.5% in June. The Industrial Production has contracted by 0.9% MoM, which was also expected to remain flat.
The next key trigger for the Pound Sterling will be the employment data for three months ending July, which will be released on Tuesday.
Daily digest market movers: Pound Sterling drops against US Dollar
- The Pound Sterling corrects to near 1.3550 against the US Dollar during European trading hours after the UK GDP data release. However, the outlook of the GBP/USD pair remains firm as the Federal Reserve (Fed) is certain to cut interest rates in the upcoming monetary policy meeting on Wednesday.
- According to the CME FedWatch tool, traders see a 7.5% chance that the Fed will cut interest rates by 50 basis points (bps) to 3.75%-4.00% on September 17, while the rest point a standard 25-bps interest rate reduction.
- Fed dovish speculation has been intensified about escalating downside labor market risks. The United States (US) Department of Labor showed on Thursday that Initial Jobless Claims for the week ending in September 5 rose to 263K, the highest level seen in almost four years.
- This week, the Nonfarm Payrolls (NFP) benchmark revision report for 12 months ending on March 2025 also showed that the economy created 911K fewer jobs than had been anticipated earlier.
- Meanwhile, inflationary pressures in the US economy have accelerated further as business owners continue to pass on the impact of tariffs imposed by President Donald Trump to end consumers. The US headline Consumer Price Index (CPI) rose at an annual pace of 2.9% in August, as expected, faster than the prior reading of 2.7%.
- In Friday’s session, investors will focus on the University of Michigan's preliminary Consumer Sentiment Index and Consumer Inflation Expectations data for September, which will be published at 14:00 GMT.
Technical Analysis: Pound Sterling remains close to 20-day EMA
The Pound Sterling retraces to near 1.3550 against the US Dollar on Friday. The near-term trend of the Cable remains sideways as it trades close to the 20-day Exponential Moving Average (EMA), which is around 1.3487.
The GBP/USD pair trades inside the Ascending Triangle pattern, which indicates indecisiveness among investors. The horizontal resistance of the above-mentioned chart pattern is plotted from the July 23 high around 1.3585, while the upward-sloping border is placed from the August 1 low near 1.3140.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a sideways trend.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the July 1 high near 1.3800 will act as a key barrier.
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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