The GBP/USD pair posts modest gains near 1.3405, snapping the two-day losing streak during the early Asian session on Thursday. The US Dollar (USD) softens against the Pound Sterling (GBP) amid concerns over a prolonged US government shutdown. The speech by Federal Reserve (Fed) Chair Jerome Powell will be in the spotlight later on Thursday.
The US government shutdown has entered its ninth day with no hint of progress toward a resolution as the Senate on Wednesday again rejected dueling Republican and Democratic funding proposals to end the federal shutdown. The competing stopgaps had already failed to pass in five previous votes.
The Bureau of Labor Statistics and the Bureau of Economic Analysis have suspended data collecting and reporting, which complicates the Fed’s decision-making on interest rates and businesses’ ability to make informed decisions. This, in turn, could weigh on the Greenback in the near term.
Minutes from the Fed’s September meeting released on Wednesday showed that a majority of policymakers supported the September rate cut and signaled further reduction later this year. However, some members favored a more cautious approach, citing concerns about inflation.
Bank of England (BoE) Chief Economist Huw Pill said on Wednesday that central bankers should adopt a “conservative” approach to setting interest rates, including responding firmly if price growth gets out of hand. The upside for the major pair might be capped as the uncertainty over the BoE’s monetary policy outlook has increased.
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.