- In the Asian session on Monday, GBP/USD was trading weakly around the 1.3310 level.
- If expectations grow that the Fed will cut interest rates further later this year, the value of the U.S. dollar could fall.
- Attention will be on provisional UK/US PMI data for September on Monday.
The GBP/USD pair fell to 1.3310, halting a three-day winning streak in early Asian trading on Monday. A slow recovery in the US Dollar (USD) is weighing on the major currency pair. Investors will be focused on preliminary UK and US Purchasing Managers' Index (PMI) data due for release later on Monday.
The Federal Reserve cut its key overnight borrowing rate by half a percentage point last week, its first rate cut since the early days of the coronavirus pandemic. In a statement, the Fed noted that “the Committee has increasing confidence that inflation is moving sustainably toward 2 percent and judges that the risks to achieving its employment and inflation objectives are roughly balanced.”
Fed Chairman Jerome Powell was cautious not to declare victory over inflation as price pressures continue to subside. Friday's release of the Fed's preferred inflation gauge, the U.S. Personal Consumption Expenditures (PCE) Index, may provide some hints about inflation developments and the outlook for U.S. interest rates. Meanwhile, uncertainty surrounding the U.S. economic outlook and rising expectations of a Fed rate cut later this year will continue to weaken the U.S. Dollar against the British Pound (GBP).
Meanwhile, Bank of England (BoE) Governor Andrew Bailey said that “it is vital to keep inflation low,” and that to do so “we need to be careful not to cut interest rates too sharply or too significantly.” The BoE decided to keep interest rates unchanged at 5.0% at its most recent monetary policy meeting. The decision came a day after UK Consumer Price Index (CPI) inflation data showed that prices remained stable at 2.2% year-on-year in August.
Frequently asked questions about the British pound
The Pound Sterling (GBP) is the world's oldest currency (886) and the official currency of the United Kingdom. According to 2022 data, it is the fourth most traded currency in the world by foreign exchange (FX) volume, accounting for 12% of all transactions, reaching an average of $630 billion per day. The main trading pairs are GBP/USD (also known as “Cable”), which accounts for 11% of FX, GBP/JPY (3%), known among traders as the “Dragon”, and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The most important factor affecting the value of the British pound is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary goal of “price stability” – a stable inflation rate of around 2%. Its main tool for achieving this is by adjusting interest rates. If inflation is too high, the Bank of England will try to contain it by raising interest rates, making it more expensive for individuals and businesses to obtain loans. Higher interest rates are generally a positive for the British pound, as they make the UK a more attractive place for investors around the world to park their funds. If inflation is too low, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to make credit cheaper and encourage businesses to borrow more to invest in projects that generate growth.
Data released measures the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of the British pound. A strong economy is good for the British pound. Not only will it attract more foreign investment, but it may also encourage the Bank of England to raise interest rates, which will directly strengthen the British pound. On the other hand, weak economic data can cause the British pound to fall.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between the income a country makes from exports and the amount it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only benefit from the additional demand created by foreign buyers looking to purchase these goods. So, if the trade balance is positive, the currency will be stronger and vice versa if it is negative.
