GBP/USD edges lower below 1.3700 on UK political risks, BoE rate cut bets

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The GBP/USD pair trades on a weaker note around 1.3685 during the European session on Tuesday. The Pound Sterling (GBP) edges lower against the US Dollar (USD) amid political risk in the United Kingdom (UK) and rising expectations of near-term Bank of England (BoE) rate cuts.

GBP/USD weakens to near 1.3685 in Tuesday’s early European session.
UK Prime Minister Starmer said he's going nowhere after rumors of resignation.
The US December Retail Sales data will be the highlight on Tuesday, ahead of the NFP report.

UK Prime Minister Keir Starmer faced a significant challenge to his leadership as Scottish Labour leader Anas Sarwar called on him to resign over the fallout from the Jeffrey Epstein scandal. Starmer continues fighting to shore up his position, saying that "after having fought so hard for the chance to change our country, I'm not prepared to walk away from my mandate and my responsibility to my country or to plunge us into chaos as others have done."

The Bank of England (BoE) is very close to cutting interest rates again after new forecasts showed inflation easing below the 2% target as early as April. Traders raise their bets for a BoE rate reduction, potentially as soon as March. This, in turn, might contribute to the Cable’s downside.

“We continue to expect the next rate cut in March. After that, we think the BOE will deliver a prolonged pause before resuming policy normalization in early 2027 (we see a terminal rate of 3.00% by mid-2027),” said Dani Stoilova, UK and Europe economist at BNP Paribas Markets 360.

On the USD’s front, the Retail Sales reading for December is due later on Tuesday. All eyes will be on the delayed jobs report for January on Wednesday. Markets' consensus forecasts the Nonfarm Payrolls (NFP) to increase by 70,000 in January, with the Unemployment Rate holding at 4.4%. Any signs of weakening in the US labor market and softer inflation could undermine the Greenback and help limit the major pair’s losses.

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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