GBP/USD weakens below 1.3350, US-China trade tensions in focus

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GBP/USD softens around 1.3345 in Monday’s early Asian session.
Trump threatened to impose fresh tariffs on China.
Traders brace for the BoE’s Mann speech later on Monday ahead of UK employment data.

The GBP/USD pair trades on a softer note near 1.3345 during the early Asian session on Monday. The US Dollar (USD) strengthens against the Pound Sterling (GBP) despite US President Donald Trump's tariff threat on China. The Bank of England (BoE) external member Catherine Mann is set to speak later on Monday. The US market is closed on Monday for the US Columbus Day.

Trump on Friday had threatened 100% tariffs on China from November 1. On Sunday, Beijing defended its curbs on exports of rare earth elements and equipment as a response to US aggression but stopped short of imposing new levies on US products. Economic uncertainty and escalating trade tensions between the world’s two largest economies could undermine the Greenback and create a tailwind for the major pair.

"However, the recent policy moves suggest a wider range of outcomes than was the case ahead of prior U.S.-China talks, with the possibility of greater concessions but also a risk of substantial new export restrictions and higher tariffs, at least temporarily,” said Jan Hatzius, chief economist at Goldman Sachs.

The upside for the major pair might be limited as traders expect the UK Chancellor of the Exchequer Rachel Reeves to raise taxes in the Autumn Statement again to address its ballooning fiscal debt, which is scheduled for late November. The announcement of fresh taxes could dampen the overall sentiment of households.

Looking ahead, the UK employment data for the three months ending in August will be in the spotlight later on Tuesday. Any signs of weakening in the UK labor market could exert some selling pressure on the Cable in the near term.

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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