- GBP/USD remains close to its one-month low hit last week, with the US dollar gaining strength.
- Bets that the Fed's policy easing will be less aggressive and geopolitical risks are supporting gains.
- Expectations that the central bank's rate cutting cycle will accelerate have weighed on the pound, favoring the bears.
The GBP/USD pair has struggled to capitalize on the gains of the modest recovery recorded over the past two days and has been fluctuating in a narrow range of 1.3050-1.3045 during Monday's Asian session. Spot prices are well within range of last Thursday's one-month low, suggesting that the recent retracement decline from the 1.3435 area, the highest since March 2022, could become prolonged.
The UK Consumer Price Index (CPI) unexpectedly fell to its lowest level since April 2021, falling below the Bank of England's (BOE) target of 2%, at a meeting on 7 November. There has been speculation that interest rates will be cut by basis points (bps). Furthermore, money markets are pricing in the possibility of further interest rate cuts from the central bank in December, which could lead to continued weakness in British pound sterling (GBP). This, along with the underlying bullish sentiment surrounding the US dollar (USD), supports a negative outlook for the GBP/USD pair.
The USD index (DXY), which tracks the U.S. dollar against a basket of currencies, started the new week on a strong note, but so far appears to have halted its modest pullback from last week's highs since early August. . The market's growing confidence that the Federal Reserve will continue to gradually cut interest rates over the next year has kept U.S. Treasury yields rising, providing a tailwind. Apart from this, geopolitical risks were also found to be another factor supporting the safe-haven USD.
In the absence of any relevant market-moving economic announcements from either the UK or the US, the underlying backdrop described above suggests that the path of least resistance for the GBP/USD pair is to the downside. Therefore, an intraday rally could be seen as a selling opportunity. However, bearish traders accepted below the psychological mark of 1.3000 before placing new bets and taking positions towards the slide towards the 100-day simple moving average (SMA) support, which is currently around the 1.2960 area. You may wait for it to happen.
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 single most important factor influencing the value of the British pound is monetary policy, as 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 a stronger pound. 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.
