- GBP/USD rebounded to around 1.2440 in early European trading on Monday.
- Fed officials emphasized the need to balance controlling inflation with maintaining a strong labor market.
- Dovish bets on the BOE could cap upside in the short term.
The GBP/USD pair extends its recovery to around 1.2440 in early European trading on Monday. However, the potential upside seems limited due to the Federal Reserve's hawkish stance. Investors are awaiting a speech from Federal Reserve Governor Lisa Cook later Monday for more clues about the outlook for U.S. interest rates this year.
The U.S. central bank has cut interest rates by 1 percentage point starting in September 2024 and has signaled it will slow the pace of rate cuts this year, providing broad support for the dollar. Federal Reserve officials reinforced over the weekend that they expect the central bank to take a more cautious approach to cutting interest rates this year. Fed policymakers warned that the fight against inflation remains, but also stressed the need to protect job market stability.
Traders will closely monitor December US labor market data, which will be released on Friday. Economists expect 150,000 new jobs to be added in December, but the unemployment rate is expected to remain at 4.2% during the same reporting period. Average hourly wages are projected to increase 0.3% month-over-month in December. A weaker-than-expected result could weigh on the USD against cables.
On the other hand, British pound sterling (GBP) could fall due to rising dovish views from the Bank of England (BoE). Markets are currently pricing in nearly 60 basis points (bp) of interest rate cuts from the BoE this year, up from 53 basis points in the last week of December. Matthew Ryan, head of market strategy at Everly, said BOE policymakers appeared to be more divided on the future direction of UK interest rates, with “weak consumer demand being offset by the impact of higher inflation”. “This reflects the mixed outlook for the UK economy,” he said. It's about the fall budget and President Trump's tariff proposals. ”
Frequently asked questions about the British pound
Pound Sterling (GBP) is the world's oldest currency (886 AD) and is the official currency of the United Kingdom. According to 2022 data, foreign exchange (FX) trade volume is the fourth largest in the world, accounting for 12% of all trades and an average of $630 billion per day. Its main trading pairs are GBP/USD, also known as the “cable”, which accounts for 11% of FX, GBP/JPY (3%), known as the “dragon” among traders, and EUR/GBP (2%) . %). Sterling is issued by the Bank of England (BoE).
The most important factor influencing the value of the pound is the monetary policy determined by the Bank of England. The Bank of England's decision will be based on whether it has achieved its main objective of “price stability,'' or a stable inflation rate of around 2%. The main tool for achieving this is interest rate adjustment. If inflation is too high, the BoE will try to control it by raising interest rates, making credit more costly for people and businesses. This is generally positive for the pound, as rising 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 that economic growth is slowing. In this scenario, the BOE would consider lowering interest rates to make credit cheaper so companies can borrow more to invest in growth-generating projects.
The data release measures the health of the economy and could impact the value of the pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of GBP. A strong economy is good for the pound. As well as attracting more overseas investment, that could prompt the BoE to raise interest rates, which could directly lead to stronger sterling. Otherwise, if economic indicators are weak, the pound may weaken.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, its currency will benefit purely from the additional demand generated from foreign buyers looking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
