- GBP/USD trades on a firmer note around 1.3125 in Friday’s early Asian session.
- The US Nonfarm Payrolls (NFP) data will be in the spotlight on Friday.
- BoE’s Bailey said he sees a chance of a more aggressive rate reduction.
The GBP/USD pair posts modest gains to near 1.3125, snapping the three-day losing streak during the early Asian session on Friday. However, the upside for the major pair might be limited as traders brace for the highly-anticipated US Nonfarm Payrolls (NFP) data, which is due later on Friday.
Federal Reserve (Fed) Chair Jerome Powell said earlier this week that the recent half-percentage point interest rate cut shouldn’t be interpreted as a sign that future moves will be as aggressive. Powell further stated that if the economic data remains consistent, there are likely two more rate cuts coming this year, but they will be smaller. The reduced bets of jumbo Fed rate cuts might underpin the Greenback in the near term.
The encouraging US economic data on Thursday supports the USD. Data released by the Institute for Supply Management (ISM) showed that the US Services Purchasing Managers Index (PMI) rose to 54.9 in September versus 51.5 prior. This figure came in above the market consensus of 51.7.
The Pound Sterling (GBP) edged lower to the two-week lows on Thursday after Bank of England (BoE) Governor Andrew Bailey’s speech. Bailey noted that the UK central bank could take a more aggressive approach to lowering interest rates as inflation stayed subdued. The remarks from Bailey have triggered the expectation of a quarter-point cut in November and a solid chance of a consecutive reduction in December.
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.
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