GBP/USD climbs closer to mid-1.3400s as trade optimism undermines the safe-haven USD
- GBP/USD kicks off the new week on a positive note, though it lacks follow-through buying.
- The US-EU trade deal boosts the risk sentiment, undermining the USD and lending support.
- Traders seem reluctant ahead of this week’s central bank event and data risks from the US.
The GBP/USD pair attracts some buyers during the Asian session on Monday and, for now, seems to have snapped a two-day losing streak to the 1.3400 neighborhood. Spot prices climb back closer to mid-1.3400s in the last hour, though the uptick lacks bullish conviction as traders seem reluctant ahead of this week's key central bank event and data risks.
The US Federal Reserve (Fed) is scheduled to announce its policy decision at the end of a two-day meeting on Wednesday, and investors will look for cues about the future rate-cut path. Apart from this, the Advance US Q2 GDP print, the US Personal Consumption Expenditure (PCE) Price Index, and the closely-watched US Nonfarm Payrolls (NFP) report will drive the US Dollar (USD) and provide a fresh impetus to the GBP/USD pair.
In the meantime, the latest optimism fueled by a trade deal between the US and the European Union (EU) triggers a fresh wave of the global risk-on trade. This, in turn, is seen undermining the safe-haven USD and acting as a tailwind for the GBP/USD pair. However, the growing acceptance that the Bank of England (BoE) could cut interest rates in August might hold back traders from placing aggressive bullish bets around the British Pound (GBP).
In the absence of any relevant market-moving economic releases on Monday, either from the UK or the US, the aforementioned fundamental backdrop warrants some caution for the GBP/USD bulls. This, in turn, makes it prudent to wait for strong follow-through buying before positioning for any further appreciating move. Nevertheless, spot prices manage to hold above the monthly swing low and remain at the mercy of the USD price dynamics.
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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