- GBP/USD gains traction around 1.3415 in Monday’s early Asian session.
- Softer US PCE inflation fueled confidence in further Fed monetary easing.
- The BoE maintains a “gradual and careful” approach to potential future rate cuts.
The GBP/USD pair edges higher to near 1.3415 during the early Asian session on Monday. The US Dollar (USD) weakens against the Pound Sterling (GBP) as the US August inflation report reinforced market expectations that the US Federal Reserve (Fed) will likely proceed with another interest rate cut in October.
The US Personal Consumption Expenditures (PCE) Price Index rose 2.7% year-over-year in August, compared to 2.6% in the previous reading, according to the US Bureau of Economic Analysis on Friday. This figure was in line with analyst forecasts. The core PCE, which excludes food and energy prices, came in at 2.9% YoY during the same period, also matching expectations.
The Fed delivered its first cut in the monetary policy meeting in the September meeting, reducing rates by 25 basis points (bps) to 4.00%-4.25%. Markets are now pricing in nearly an 88% chance of a Fed rate cut in October and a 65% possibility of another reduction in December, according to the CME FedWatch Tool.
On the GBP’s front, traders anticipate the Bank of England (BoE) to hold interest rates steady at 4.0% in the remainder of the year, which provides some support to the Cable. The UK central bank is unlikely to cut rates in the near term as inflationary pressures in the UK economy are proving to be persistent.
Looking ahead, the Fedspeak will be closely watched later on Monday. Fed officials are scheduled to speak, including Fed Governor Christopher Waller, Cleveland Fed President Beth Hammack, St. Louis Fed President Alberto Musalem, New York Fed President John Williams, and Atlanta Fed President Raphael Bostic. If the policymakers deliver hawkish remarks, this could lift the Greenback and cap the upside for the major pair.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher 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 economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.