GBP/USD extends the rally above 1.3550 ahead of UK monthly GDP data
- GBP/USD gains ground to near 1.3580 in Thursday’s Asian session.
- Traders see the Fed will cut its borrowing costs by September.
- The UK monthly GDP and US PPI data will take center stage later on Thursday.
The GBP/USD pair extends its upside to near 1.3580 during the Asian trading hours on Thursday. The cooler-than-expected US inflation data weighs on the US Dollar (USD) against the Pound Sterling (GBP). The UK monthly Gross Domestic Product (GDP) for April and the US Producer Price Index (PPI) report will be in the spotlight later on Thursday.
Traders raise their bets that the US Federal Reserve (Fed) will deliver a rate cut by September. Some analysts expect the Fed will deliver more than one interest-rate cut this year. This, in turn, exerts some selling pressure on the major pair.
Following the CPI report, traders have priced in 47 basis points (bps) of Fed easing by the end of the year, compared to about 42 bps before the CPI data, according to Bloomberg. While the Fed’s next move is fully priced in for October, traders increased expectations for a cut in September to around a 75% chance.
On the other hand, weaker UK employment data increased market expectations that the Bank of England (BoE) will cut interest rates by more than investors had projected earlier. This might cap the upside for the Cable in the near term. However, traders will take more cues from the UK monthly GDP data on Thursday, which is expected to shrink by 0.1% after expanding 0.2% in March. In case of a surprise upside in the UK GDP figure, this could underpin the GBP.
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.