GBP/USD gathers strength above 1.3350 on Fed rate cut hopes
- GBP/USD trades on a positive note around 1.3365 in Tuesday’s early European session.
- The Cable strengthens against the US Dollar, bolstered by upbeat UK Retail Sales and flash S&P Global PMI data.
- The Fed is expected to cut rates at its October meeting.
The GBP/USD pair gains ground to near 1.3365 during the early European session on Tuesday. The US Dollar (USD) weakens against the Pound Sterling (GBP) amid the expectation that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement on Wednesday.
The recent softer-than-expected US Consumer Price Index (CPI) inflation data released on Friday has fueled rate cut bets, which weighs on the Greenback. “In the absence of the official data for jobs, they're going to lean on other sources of information, which at this point aren't really going to contradict what they have argued as their reason for cutting,” former Kansas City Federal Reserve president Esther George said in an interview.
The US central bank is expected to trim its benchmark interest rate by a quarter percentage point at its October meeting on Wednesday. According to the CME FedWatch tool, traders have priced in nearly a 97% chance of a 25-basis-point (bps) reduction in interest rates to 3.75%-4.00%. This would be the second straight interest-rate cut by the Fed.
The upbeat UK Retail Sales and stronger-than-expected flash S&P Global Purchasing Managers’ Index (PMI) data released on Friday underpin the Cable against the USD. The Bank of England's (BoE) Monetary Policy Committee will announce its next interest rate decision on November 6, 2025, with consensus on whether a rate reduction will happen being mixed.
The Chancellor's Autumn Budget is scheduled for November 26. Economists believe the committee will likely wait to assess the budget's potential impact on inflation before adjusting policy again. Concerns over the UK's fiscal uncertainty and weakening growth prospects could undermine the GBP.
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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