British Pound weakens below 1.3250 on UK political risks, BoE repricing
- GBP/USD softens to near 1.3245 in Wednesday’s early Asian session.
- UK political risks and BoE repricing could weigh on the British Pound.
- Traders expect multiple US rate hikes this year; traders await upcoming US jobs data for clues on the Fed's next move.
The GBP/USD pair trades in negative territory around 1.3245 during the early Asian trading hours on Wednesday. Traders await the UK political developments, focusing on potential leadership by Andy Burnham and adherence to existing fiscal rules. Bank of England (BoE) Governor Andrew Bailey is set to speak later in the day. On Thursday, all eyes will be on the US jobs data for June.
The UK's likely next Prime Minister Burnham vowed on Monday to deliver radical change to the nation's politics by handing more power to its regions and by encouraging collaboration over argument in a 10-year mission to spur "good" growth. Traders will closely monitor choice for finance minister, which could prove crucial to the outlook for both the pound and the gilt market.
Keir Starmer last week faced political pressure and announced he would step down as leader of the ruling Labour Party. The schedule to pick a successor could see Burnham installed as Prime Minister as soon as July 17, if no other challenger emerges.
A further re-pricing of BoE rate hike expectations is likely to weigh on the British Pound (GBP) against the US Dollar (USD). Economists expect the UK central bank to keep its benchmark interest rate steady at 3.75% through the end of the year, following previous pauses, according to Reuters.
Across the pond, at least three Federal Reserve (Fed) rate hikes are expected this year by traders, who are currently pricing in about a 64% chance of a September increase, according to the CME FedWatch Tool. Traders will take more cues from the US June ADP employment and Nonfarm Payrolls (NFP) data, which could help traders gauge the Fed’s stance on rate hikes.
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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