GBP/USD knocks ten-week highs ahead of holiday slowdown
- GBP/USD climbed back above 1.3450 for the first time since October.
- The BoE’s path forward on interest rates has become exceptionally cloudy.
- Wobbly economic metrics mix dangerously with haphazard new BoE policy approach.
GBP/USD found room on the high side on Monday, kicking off a holiday-shortened trading week with a fresh spat of Greenback weakness, bolstering the Pound Sterling (GBP) into its highest bids in ten weeks. Pound traders are largely brushing off the latest interest rate cut from the Bank of England (BoE) as the UK’s central bank policy strategy leaves the water murky for rate-cut watchers.
The Federal Reserve’s (Fed) own third straight rate cut recently has sapped support from the US Dollar (USD), sending the Greenback broadly lower across the board as markets head into an early closure this week for the holidays.
US ADP Employment change and Gross Domestic Product (GDP) growth figures are due on Tuesday and will serve as the final spurt of US economic data before the holiday shutdown. The ADP 4-week average last clocked in at a relatively disappointing 16.25K, implying that ongoing weakness in the US labor market is likely to continue. On the growth front, Annualized US GDP for the third quarter is expected to slow to 3.2% from 3.8%, flying in the face of Trump administration staff who have been suggesting that American growth could accelerate to 4-5% heading into the end of the year.
The Boe’s newfound policy approach of emphasizing “alternative scenarios” rather than a direct economic forecast and policy outlook will put pressure on rate-watchers moving forward. The nine members of the Monetary Policy Committee (MPC) will also directly disclose their personal interest rate outlook and policy approaches on a per-meeting basis. The BoE famously produces dissenting, or at least loud, policy opinions from its central planning members, especially compared to its more contemporary peer the Fed, which is famous for appearing to approach something similar to policy alignment in its statements.
GBP/USD daily chart
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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