The GBP/USD pair has had a tough time building on last week’s gains, fluctuating around 1.3350 during Asian trading on Monday. Plus, it’s worth noting that the spot prices are still below the significant 200-day simple moving average (SMA), suggesting a cautious approach might be smart, especially with the 1.3140 area on the horizon, or the possibility of extending the recent rebound from the lows seen back in June.
The US dollar kicked off the year on a robust note, largely due to escalating concerns about the critical Strait of Hormuz. This twist is a notable obstacle for the GBP/USD pair. On Saturday, Iran’s ambassador to China mentioned that Iran intends to impose new service fees for vessels passing through the strategic waterway, despite the US pushing back against this plan. Such tensions contribute to the geopolitical risk premium, favoring the safe-haven status of the Greenback.
In the meantime, traders are dialing down their expectations on the Federal Reserve hiking interest rates following a less than stellar monthly jobs report from the U.S. that came out last Thursday. It indicated there might be some cooling in working conditions. Moreover, as inflation worries ease due to falling oil prices, the market’s outlook on prolonged interest rate increases is shifting. There’s been a notable adjustment in expectations, with the anticipations of no Fed rate hikes and one hike by 2026 moving from one to two, potentially dampening aggressive sentiments among USD bulls and offering some support to the GBP/USD pair.
On another front, the British pound is seeing some positive movements due to a commitment made by Andy Burnham, who is a leading contender to succeed Keir Starmer as Prime Minister. He has pledged to adhere to strict borrowing guidelines. Yet, last week’s mixed UK PMIs are signaling a significant economic slowdown largely driven by the crucial services sector, which could be weighing on sterling bulls. Attention is currently shifting to the UK construction PMI, which might have a limiting effect on the GBP/USD pair. Concurrently, U.S. economic data focusing on the ISM Services PMI could inject some momentum later in the North American trading session.
Frequently asked questions about the British pound
The Pound Sterling (GBP) holds the title of the world’s oldest currency, dating back to 886 AD, and serves as the official currency for the United Kingdom. As of 2022, its foreign exchange trade volume ranks fourth globally, comprising 12% of all trades, averaging about $630 billion daily. The primary trading pairs for GBP include GBP/USD, also known as “cable,” accounting for 11% of FX, GBP/JPY (3%), termed the “dragon,” and EUR/GBP (2%). The Bank of England (BoE) is responsible for issuing the currency.
Monetary policy plays a crucial role in determining the value of the British pound, and this is shaped by the Bank of England’s decisions. Their course of action typically hinges on whether they’ve managed to maintain “price stability,” aiming for an inflation rate around 2%. The key tool for addressing inflation involves adjusting interest rates. When inflation rises excessively, the Bank might hike rates to control it, which generally benefits the pound by making the UK a more appealing destination for global investments. Conversely, if inflation dips too low, indicating slowing economic growth, the BoE might consider cutting rates to encourage borrowing.
Economic health indicators, like GDP, manufacturing, services PMI, and employment data, significantly influence the pound’s value. A strong economic performance could foster more overseas investments, possibly prompting the BoE to increase interest rates, which might strengthen the pound. However, weak economic indicators could have the opposite effect, weakening the currency.
Another critical data point for the British pound is the trade balance, which measures the difference between a country’s earnings from exports and its spending on imports over a timeframe. A positive net trade balance—achieved through the production of sought-after export goods—can bolster the currency due to increased foreign demand. In contrast, a negative balance can lead to currency weakening.
