- GBP/USD has attracted some sellers on Friday, weighed down by the USD's modest strength.
- Betting that the Fed will make another big rate cut in November will limit any gains.
- The central bank's relatively hawkish expectations should help limit losses for the currency pair.
The GBP/USD pair fell during Asian trading on Friday, moving away from its previous high around 1.3435, its highest since March 2022. Spot prices have dipped below the 1.3400 mark in the past hour as the US dollar (USD) edged higher, but a meaningful correctional decline remains elusive.
The dollar has attracted some buyers, paring yesterday's losses, with some repositioning trading ahead of the Personal Consumption Expenditures (PCE) price index, a key U.S. inflation statistic, to be released later today. Some parts were reversed. On the other hand, the upbeat mood of the market and rising expectations for more aggressive policy easing by the Federal Reserve (Fed) will likely limit the upside as a safe-haven asset.
Despite the fact that several Federal Reserve officials this week tried to push back on calls for more aggressive policy easing, markets are betting on another big interest rate cut in November. This reflects the fact that the possibility is increasing. This should overshadow Thursday's better-than-expected US macro data, deter USD bulls from making new bets, and in turn support the GBP/USD pair.
Meanwhile, global risk sentiment is supported by expectations that interest rate cuts will boost global economic activity. Added to this is a series of stimulus measures from the People's Bank of China (central bank), including Friday's announcement to cut the seven-day repo rate from 1.7% to 1.5% and reduce the reserve reserve ratio (RRR) by 50bps. Additionally, it increases investor appetite for riskier assets.
Furthermore, expectations that the Bank of England's (BoE) rate cutting cycle is likely to be slower than that of the United States (US) should continue to support the British pound (GBP) and help limit losses in the GBP/USD pair. For this reason, it would be wise to wait for a solid follow-through sell-off before confirming a near-term ceiling for the majors, which remain on track to end this week on a strong note.
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 “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.
