GBP/USD softens to below 1.3450 on renewed US Dollar demand

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The GBP/USD pair posts modest losses near 1.3440 during the Asian trading hours on Friday.

GBP/USD drifts lower to around 1.3440 in Friday’s Asian session.
Traders are pricing two Fed rate cuts this year.
The BoE cut interest rates from 4.25% to 4.0% on Thursday, as widely expected.

The GBP/USD pair posts modest losses near 1.3440 during the Asian trading hours on Friday. The US Dollar (USD) strengthens against the Pound Sterling (GBP) after Federal Reserve (Fed) Governor Christopher Waller has reportedly emerged as the top contender to succeed embattled Fed Chair Jerome Powell. The Fed’s Alberto Musalem is scheduled to speak later on Friday.

Bloomberg reported on Thursday that Fed Governor Christopher Waller is emerging as a top candidate to be the next Fed Chair. Waller favored a 25 basis point (bps) rate cut last week, while his colleagues voted to hold rates steady. Traders are now pricing in nearly a 93% odds of a rate reduction in September, with at least two rate cuts priced in by the end of the year.

Additionally, US President Donald Trump on Thursday selected Stephen Miran to serve on the Fed Board of Governors, replacing Adriana Kugler following her surprise resignation last week.

The Bank of England (BoE) decided to cut interest rates from 4.25% to 4.0% at its August meeting on Thursday. However, four of its nine policymakers sought to keep borrowing costs steady, suggesting the BoE's run of rate cuts might be nearing an end.

The UK central bank revealed “a gradual and careful approach” to further cuts on the Bank Rate but added that “the restrictiveness of monetary policy had fallen as the Bank Rate had been reduced. Hawkish rate cuts from the BoE might cap the downside for the major pair in the near term. Investors trimmed their bets on the chance of another BoE rate reduction by the end of 2025 and were only fully pricing in a cut to 3.75% in February next year, according to data from LSEG.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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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