- GBP/USD climbed above 1.3400 on Wednesday after dipping below 1.3350.
- The currency market is gearing up for central bank announcements from both the Fed and the BOE this month.
- There’s a preview for the US ADP jobs report on Thursday, with market sentiment closely linked to hopes for a Fed rate reduction.
The GBP/USD pair made a recovery on Wednesday, rising from a recent low under 1.3350 to move above 1.3400. Traders are increasingly vocal about wanting interest rate cuts from the Federal Reserve, while remarks from Bank of England (BOE) Governor Andrew Bailey seem to have capped some of the gains for the pound.
Currently, GBP/USD is avoiding the 50-day exponential moving average (EMA) near 1.3460, but the recent price moves have created potential downward pressure. A new test below 1.3400 could signal a further decline, although the overall backdrop of weakening US dollar sentiment might push the pair back toward multi-year highs above 1.3600.
Dovish Bailey calms expectations of a tightening QE
BOE Governor Bailey indicated that the central bank is still in the critical “discussion” phase regarding adjustments to its quantitative easing (QE) plan. The BOE revisits its QE strategy annually during the interest rate meeting in September. Some UK legislators are urging the BOE to purchase government debt to better reflect government spending. However, that may not be straightforward; BOE’s losses on UK debt are estimated to be around £10 billion, and the UK economy may struggle to handle even minor changes in bond buying strategies.
The spotlight now is on the US ADP employment change figures for August and the recent ISM Purchase Manager Index (PMI). The ADP employment data will be released Thursday. While this data often has questionable correlation with the official non-farm payrolls jobs report due Friday, investors still anticipate these early figures. Expectations are also for the ISM Services PMI to indicate a more favorable business outlook as companies prepare for the fourth quarter.
GBP/USD Daily Chart
Pound Sterling FAQ
Pound Sterling (GBP) is recognized as the world’s oldest currency, dating back to 886 AD, and serves as the official currency of Britain. As of 2022, it ranks as the fourth most traded currency, comprising 12% of global forex transactions, with an average daily trading volume of $630 billion. Its primary trading pair is GBP/USD, often referred to as “cable,” accounting for 11% of forex, alongside GBP/JPY, also known as “dragon” (3%), and EUR/GBP (2%). The currency is issued by the Bank of England (BOE).
The value of the pound is predominantly influenced by the monetary policy set by the Bank of England. This central bank continuously assesses whether it has achieved its primary goal of maintaining “price stability,” targeting a stable inflation rate near 2%. To manage this, it primarily uses interest rate adjustments. If inflation spikes, the BOE may increase rates, which tends to make the UK a more appealing option for global investors. Conversely, if growth slows and inflation dips, the BOE might consider lowering rates to encourage borrowing and investment.
Economic health indicators also play a role in determining the pound’s value. Metrics such as GDP growth, manufacturing and services PMI, and employment rates can greatly influence GBP’s trend. A robust economy can attract foreign investment, potentially driving the pound up as the BOE may raise interest rates as a result. Weak data, however, could lead to a depreciation of the currency.
Trade balance is another vital indicator for Pound Sterling. This metric evaluates the difference between a country’s export earnings and its import expenses over time. Strong exports can bolster demand for the currency as foreign buyers seek these goods, while a negative trade balance can weaken it.
