GBP/USD stays firm above 1.3800, with 1.3870 long-term highs in sight
- GBP/USD returned above 1.3800 after bouncing at 1.3750 lows.
- The US Dollar remains vulnerable despite the Fed's hawkish message.
- Technical analysts at UOB Group see the pair trending higher towards 1.3925.
The Pound has taken back most of the ground lost on Wednesday, and is trading in the area of 1.3830 on Thursday’s early London session, after bouncing at 1.3750 lows, with the four-year highs of 1.3870 at a relatively short distance.
The US Dollar bounced up on Wednesday, following a hawkishly tilted Federal Reserve (Fed) monetary policy decision and supporting comments by US Treasury Secretary Scott Bessent, but failed to find follow-through. The erratic US trade policy and attacks on the Federal Reserve’s independence continue undermining confidence in the Greenback.
A hawkish Fed fails to support the USD
The Fed left interest rates on hold and improved its economic outlook, which endorsed the view of od an extended rate pause. Investors, however, remain convinced that the easing cycle will resume when Trump replaces Chairman Powell with a more dovish Fed chief.
Furthermore, US Treasury Secretary Scott Bessent affirmed that Washington pursues a strong Dollar policy and denied any coordinated plan with Japan to support the Yen, a rumour that sent the US Dollar tumbling last week.
In the UK, the strong Shop Prices Index released on Tuesday provided some support for an already strong Sterling, buoyed by the upbeat retail consumption and business activity figures seen last week.
Looking ahead, the UOB Group’s Technical Analysis team sees the Pound in a consolidation phase, ahead of a further upleg towards 1.3925: "Impulsive upward momentum indicates further upside risk, and GBP may rise to 1.3925 next (...) We will maintain the same view as long as GBP holds above 1.3710."
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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