GBP/USD recovers its losses registered in the previous two successive sessions, trading around 1.3350 during the Asian hours on Wednesday. The pair appreciates as the US Dollar (USD) declines on the increased likelihood of further rate cuts by the Federal Reserve (Fed) in 2025. CME FedWatch Tool indicates that markets are now pricing in nearly a 94% chance of a Fed rate cut in October and a 93% possibility of another reduction in December.
The odds for further Fed rate cuts increased after the US Federal Reserve (Fed) Chair Jerome Powell stated on Tuesday that the central bank is on track to deliver another quarter-point interest-rate reduction later this month, even as a government shutdown significantly reduces its read on the economy. Powell highlighted the low pace of hiring and noted that it may weaken further.
Boston Fed President Susan Collins claimed that the policy is not on a preset path; there are scenarios that would keep rates steady, and that policy would remain restrictive even with more easing. Traders will likely observe speeches from Fed officials, including Stephen Miran, Christopher Waller, and Jeff Schmid, later in the day.
The upside of the GBP/USD pair could be limited as the Pound Sterling (GBP) may struggle due to signs of a cooling UK labor market, which has boosted expectations for more interest rate cuts by the Bank of England (BoE) in the remainder of the year. Traders expect the BoE to cut interest rates further by 46 basis points (bps) this year, according to Reuters.
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.