GBP/USD holds gains above 1.3650 as BoE rate decision looms
- GBP/USD drifts higher to near 1.3685 in Tuesday’s early European session.
- The Bank of England is expected to keep policy rates on hold at its February policy meeting on Thursday.
- US Manufacturing PMI signaled stronger expansion in January.
The GBP/USD pair gains momentum to around 1.3685 during the early European session on Tuesday. The Pound Sterling (GBP) gathers strength against the Greenback on the cautiously hawkish stance of the Bank of England (BoE). All eyes will be on the BoE interest rate decision later on Thursday.
The BoE’s Monetary Policy Committee voted 5-4 to cut the Bank Rate in December, the fourth quarter-point reduction of 2025. But most of its policymakers suggested the pace of rate cuts could slow. The UK central bank will announce its policy decision later this week, and most economists expect the UK central bank to keep the benchmark rate on hold at 3.75% due to persistent inflation.
On the other hand, the upbeat US Manufacturing Purchasing Managers' Index (PMI) could underpin the US Dollar (USD) and create a headwind for the major pair. The Institute for Supply Management's (ISM) report on Monday showed that the US Manufacturing PMI exceeded expectations, rising to 52.6 in January from 47.9 in December. This report suggested the US Federal Reserve (Fed) could remain on hold for an extended period.
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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