GBP/USD gathers strength above 1.3600 on softer US Dollar
- GBP/USD strengthens to near 1.3605 in Thursday’s Asian session.
- Most policymakers see rate cuts coming, FOMC Minutes showed.
- Traders await the US Initial Jobless Claims on Thursday ahead of the UK May GDP data.
The GBP/USD pair gains ground around 1.3605 during the Asian trading hours on Thursday. The Greenback softens against the Pound Sterling amid the prospects for more interest rate cuts by the Federal Reserve (Fed) this year. Traders await the US weekly Initial Jobless Claims data later on Thursday. Also, the Federal Reserve (Fed) officials are scheduled to speak, including Alberto Musalem, Christopher Waller and Mary Daly.
US President Donald Trump on Monday warned trading partners of sharply higher US tariffs from August 1, after he delayed all but 10% of his April levies on most countries to give them time to strike agreements with the US. US Deputy Treasury Secretary Michael Faulkender remarked on Wednesday that even if tariffs were implemented, discussions may continue beyond the August deadline. Nonetheless, tariff uncertainty triggered by Trump could undermine the US Dollar (USD) and create a tailwind for the major pair.
Most participants at the Fed's meeting saw some reduction in the Fed funds rate this year as appropriate, citing that any price shock from tariffs was expected to be "temporary or modest,” according to the FOMC Minutes. After the FOMC Minutes were published, traders pared their bets on a rate cut at the Fed's July 29-30 meeting, with rate futures continuing to point to 50 basis points (bps) of cuts by the end of this year, according to Reuters.
Traders will keep an eye on the UK Gross Domestic Product (GDP) for May for fresh impetus. The UK economy is estimated to grow by 0.1% MoM in May from a contraction of 0.3% in the previous reading. In case of a weaker-than-expected outcome, this could drag the Cable lower against the USD in the near term.
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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