British Pound nudges higher above 1.3350 despite rising Fed hike bets
- GBP/USD edges higher to near 1.3385 in Thursday’s Asian session.
- Traders raise their bets on US rate hikes after upbeat US economic data.
- BoE officials signaled the central bank is in "no rush to raise interest rates.
The GBP/USD pair gathers strength to around 1.3385 during the Asian trading hours on Thursday. However, the potential upside might be limited amid rising expectations for higher-for-longer US interest rates. Markets might turn cautious later in the day ahead of the US Producer Price Index (PPI) report.
A combination of robust labor and hot inflation reports from the US has reinforced a "higher for longer" stance from the Fed, which could lift the US Dollar (USD) and act as a headwind for the major pair.
Markets are now pricing in a 43.7% probability of a quarter-point rate hike in December, up from just about 14% a month ago, according to the CME FedWatch tool.
Traders will closely monitor the next US PPI inflation data for the outlook for Fed rates, especially with Chairman Kevin Warsh taking the helm. Major analysts have delayed rate cut expectations. Goldman Sachs anticipates the US central bank to hold rates steady through 2026, with the next cut not occurring until 2027
On the UK’s front, Bank of England (BoE) policymaker Alan Taylor said earlier this week that interest rates at their current level were restrictive for the economy and he did not see the need for a rate hike to tackle inflationary pressures that have grown as a result of the Iran war.
BoE Governor Andrew Bailey stated last week that the bank is in "no rush to raise interest rates.” Traders await the monthly UK Gross Domestic Product (GDP) data on Friday, which could provide fresh directions on the BoE's rate path.
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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