GBP/USD consolidates around 1.3400, remains close to two-month low
- GBP/USD struggles to gain any meaningful traction and remains confined in a range.
- Bets that the BoE could cut rates in August undermine the GBP and cap spot prices.
- Mixed Fed rate cut signals keep the USD bulls on the defensive and offer support.
The GBP/USD pair kicks off the new week on a subdued note and oscillates in a narrow band, just above the 1.3400 round figure during the Asian session. Meanwhile, spot prices remain well within striking distance of a nearly two-month low touched last week.
The US Dollar (USD) remains on the back foot below the monthly peak touched last Thursday amid mixed signals about the Federal Reserve's (Fed) rate-cut path, which, in turn, is seen acting as a tailwind for the GBP/USD pair. In fact, Fed Governor Christopher Waller last week backed the case for a rate cut in July. Investors, however, seem convinced that the US central bank will keep interest rates higher for longer amid the evidence that the Trump administration's increasing import taxes are passing through to consumer prices.
The British Pound (GBP), on the other hand, is undermined by the growing acceptance that the Bank of England (BoE) could cut interest rates in August. The bets were reaffirmed by the UK jobs data last Thursday, which showed that the unemployment rate rose to a four-year high level of 4.7% and the annual rate of pay growth in the three months between March and May slowed to 5%, or the lowest since the second quarter of 2022. This, to a larger extent, overshadows still sticky UK inflation and contributes to capping the GBP/USD pair.
The market focus now shifts to BoE Governor Andrew Bailey's testimony before the Treasury Select Committee on Tuesday. Apart from this, the release of the flash PMIs from the UK and the US, along with the UK Retail Sales data, could provide some meaningful impetus to the GBP/USD pair during the latter part of the week. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains to the downside, and any attempted recovery could be seen as a selling opportunity.
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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