- GBP/USD weakens around 1.3125 in Tuesday’s early European session.
- Traders prefer to wait on the sidelines ahead of US ISM PMI data.
- Investors expect no rate cut by the BoE in the September meeting but see another 25 bps rate cut in November.
The GBP/USD pair trades on a weaker note near 1.3125 during the early European session on Tuesday. The sell-off of the major pair is dragged lower by the firmer US Dollar (USD) ahead of the key US economic data. The Bank of England (BoE) Deputy Governor Sarah Breeden is set to speak later on Tuesday, followed by the release of the US ISM Manufacturing Purchasing Managers Index (PMI).
Investors gain more confidence that the US Federal Reserve (Fed) will start easing the monetary policy at its upcoming meeting in September, pricing in the odds of nearly 69% of the 25 basis points (bps) rate cut, according to the CME FedWatch tool. Fed Chair Jerome Powell not only said at the annual Jackson Hole symposium last month that “time has come for policy to adjust.”
The firmer Fed rate cut might weigh on the Greenback in the near term. Rabobank analysts currently expect four Fed rate cuts between September and January and then hold for the rest of 2025. Friday’s US Nonfarm Payrolls (NFP) report will be more significant than usual and might offer some hints about the size and pace of the Fed rate cut. The US economy is expected to see 163K job additions in August, while the Unemployment Rate is expected to tick lower to 4.2%.
On the other hand, the markets anticipate no rate cut by the BoE in the September meeting, while the possibility of a 25 bps rate cut in the November meeting stands at 87.2%. In the absence of top-tier economic data releases from the UK this week, the USD price dynamic will be the main driver for the GBP/USD.
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, aka ‘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.