GBP/USD slips below 1.3350 as traders adopt caution due to US data blackout
- GBP/USD falls due to increased risk aversion as the ongoing government shutdown results in a US data blackout.
- The US Dollar gained after President Trump said he expects to reach several agreements with Chinese President Xi Jinping.
- The Pound Sterling weakened after data showed easing UK inflation for September.
GBP/USD extends its losing streak for the fifth consecutive day, trading around 1.3340 during the Asian hours on Thursday. The pair depreciates as the US Dollar (USD) draws support due to increased risk aversion as traders are expected to approach the United States (US) inflation data due on Friday cautiously amid the ongoing government shutdown and resulting data blackout.
The Greenback also gains ground amid optimism surrounding the United States (US)-China trade deal. US President Donald Trump said late Wednesday that he expects to strike several agreements with Chinese President Xi Jinping during their meeting in South Korea next week. The Trump-Xi talks are set to address various issues, including U.S. soybean exports, nuclear arms limits, and China’s Russian Oil purchases.
The CME FedWatch Tool indicates that markets are now pricing in nearly a 97% chance of a Fed rate cut in October and a 96% possibility of another reduction in December. A Reuters poll suggested that 115 out of 117 economists have predicted that the Fed will reduce interest rates by 25 basis points (bps) to 3.75%-4.00% in the monetary policy announcement on October 29. For the year, 83 of 117 economists expect the US Federal Reserve to cut interest rates twice, while 32 anticipate one cut.
Additionally, the GBP/USD pair depreciates as the Pound Sterling (GBP) faces intense selling pressure after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for September on Wednesday.
The UK Consumer Price Index (CPI) rose 3.8% year-over-year (YoY) in September, against the market expectations of a 4.0% increase in the reported period. The reading was well above the Bank of England’s (BoE) 2% inflation target. Meanwhile, the core CPI (excluding volatile food and energy items) rose 3.5% YoY, compared to August’s 3.6% print, while missing the forecast of 3.7%.
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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