GBP/USD maintains position above 1.3700 ahead of UK Q1 GDP data
- GBP/USD receives support as the US Fed is expected to cut rates in September.
- Traders await US labor market data to gain further impetus on the Fed’s policy stance.
- The Bank of England adopts caution on rate cuts as UK inflation remains sticky.
GBP/USD inches higher ahead of the United Kingdom’s (UK) Gross Domestic Product for the first quarter, trading around 1.3720 during the Asian hours on Monday. The pair may gain ground as the US Dollar (USD) may further depreciate, as traders expect the Federal Reserve (Fed) to cut rates at the September meeting.
On Friday, data showed that US Personal Spending unexpectedly fell in May, the second decline this year. Meanwhile, US Personal income dropped by 0.4% in May, the largest decrease since September 2021. The week ahead welcomes a slew of key US employment figures, which may further offer fresh impetus on the US Federal Reserve’s (Fed) policy outlook.
The June US payrolls report is expected to show the economy added 110,000 new jobs, down from 135,000 in May – the estimate range is currently between a high of 140,000 and a low of 75,000. Moreover, Unemployment is anticipated to tick higher to 4.3% from 4.2%.
The GBP/USD pair also appreciates as the Pound Sterling (GBP) receives support from the Bank of England’s (BoE) cautious stance on rate cuts, as inflation in the United Kingdom (UK) remains stubborn. Core inflation has remained largely unchanged over the past year, causing concern among BoE officials and complicating rate cut decisions.
Meanwhile, political tensions have escalated in the United Kingdom as Prime Minister Keir Starmer scaled back welfare reform plans to contain rebellion by lawmakers in his governing Labour Party. Over 100 Labor MPs had publicly opposed the plan, which aimed to cut £5 billion annually from the soaring welfare budget.
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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