Pound Sterling softens to near 1.3500 as traders pare bets on Fed rate cut
- GBP/USD edges lower to around 1.3500 in Tuesday’s early European session.
- Markets predict just one Fed rate cut this year.
- The upbeat UK Q2 GDP report could complicate the BoE rate cut path.
The GBP/USD pair trades on a softer note near 1.3500 during the early European session on Tuesday. The US Dollar (USD) posts modest gains against the Pound Sterling (GBP) as traders pared bets on a rate cut at the US Federal Reserve (Fed) September 16-17 meeting. The UK July Consumer Price Index (CPI) inflation report will take center stage later on Wednesday.
A report last week showed that the US Producer Price Index (PPI) increased by the most in three years in July amid a surge in the costs of goods and services. This, in turn, prompted traders to reduce expectations of rate reduction, supporting the Greenback. The Fed is expected to cut interest rates in September and once more this year, according to most economists from the Reuters poll.
Traders brace for the Fed’s annual Jackson Hole conference later on Friday for fresh impetus. However, renewed concerns over the Fed’s independence from political interference could drag the USD lower and act as a tailwind for the major pair.
On the GBP’s front, the upbeat UK Gross Domestic Product (GDP) report for the second quarter (Q2) could complicate the Bank of England’s (BoE) path to cutting interest rates further and might help limit the GBP’s losses. The UK GDP slowed to 0.3% in the three months to June, down from a rate of 0.7% in Q1, but came in stronger than the expectation of a 0.1% expansion in the reported period.
(This story was corrected on August 19 at 04:40 GMT to say, in the first paragraph, that the UK July Consumer Price Index (CPI) inflation report will take center stage later on Wednesday, not Tuesday.)
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.