GBP/USD consolidates around mid-1.3500s ahead of this week’s key data/central bank event risks
- GBP/USD kicks off the new week on a softer tone amid rising geopolitical tensions.
- The USD struggles to gain any meaningful traction and lends support to the major.
- Traders also seem reluctant ahead of the UK CPI and Fed/BoE meetings this week.
The GBP/USD pair remains on the defensive below a three-year top touched on Friday, though it lacks bearish conviction and oscillates in a narrow band around mid-1.3500s during the Asian session. Traders seem reluctant and opt to wait for this week's key data/central bank event risks before positioning for the next leg of a directional move for spot prices.
The latest UK consumer inflation figures will be released on Wednesday ahead of the Bank of England (BoE) policy meeting on Thursday, which will play a key role in influencing the British Pound (GBP). Furthermore, the US Federal Reserve (Fed) is scheduled to announce its policy decision on Wednesday, which will drive the US Dollar (USD) and provide some meaningful impetus to the GBP/USD pair.
In the meantime, Friday's weaker UK GDP print, showing that the economy contracted more than expected, by 0.3% in April, lifted expectations that the BoE will cut interest rates more aggressively than anticipated. The USD, on the other hand, draws some support from the global flight to safety, fueled by rising geopolitical tensions in the Middle East, and contributes to capping the upside for the GBP/USD pair.
However, the growing acceptance that the US central bank will also resume its rate-cutting cycle in September, amid signs of easing inflation in the US, holds back the USD bulls from placing aggressive bets. Moreover, a generally positive risk tone acts as a headwind for the safe-haven buck and lends some support to the GBP/USD pair, warranting some caution before confirming that spot prices have topped out.
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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