GBP/USD weakens to near 1.3150 as US Senate reaches deal to extend government funding
- GBP/USD softens to around 1.3150 in Monday’s early Asian session.
- US Senate on Sunday moved toward a vote on reopening the federal government.
- The BoE left interest rates unchanged at 4%, with a 5-4 narrow majority vote.
The GBP/USD pair loses traction to near 1.3150, snapping the three-day losing streak during the early Asian session on Monday. The US Dollar (USD) strengthens against the Pound Sterling (GBP) amid positive signs that the record-breaking US government shutdown may end. Traders will keep an eye on the speech from the Bank of England (BoE) Clare Lombardelli later on Monday.
Bloomberg reported early Monday that the US government shutdown is nearing an end after a group of centrist Senate Democrats agreed to support a deal to reopen the government and fund some departments and agencies for the next year.
The source said that federal employees would receive back pay and states would resume delayed federal transfers under the agreement. The measure would fund certain departments through January 30, while others would receive full-year appropriations. Hopes for ending the US government shutdown could provide some support to the US Dollar (USD) and create a headwind for the major pair.
On the other hand, renewed US labor market concerns have resulted in a slight increase in investors' expectations, supporting more interest rate cuts by the Federal Reserve (Fed) this year. Markets are now pricing in nearly a 66% odds of a 25 basis points (bps) rate cut in December, according to the CME FedWatch tool.
The BoE decided to hold interest rates steady at 4.0% last week, citing caution ahead of the UK government’s Autumn Budget in November. BoE Governor Andrew Bailey signaled that rate reductions are coming, with economists now pricing in a pre-Christmas rate cut. The UK central bank cautioned that future rate cuts “will therefore depend on the evolution of the outlook for inflation.
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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