GBP/USD edges lower to near 1.3100 on potential for further BoE rate cuts

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GBP/USD edges lower around 1.3120 during Asian hours on Friday, after rising 1% over the past two sessions. The pair depreciates as the Pound Sterling (GBP) weakens following the Bank of England’s (BoE) dovish hold in November.

GBP/USD depreciates as the Pound Sterling struggles on the BoE signaling for further policy easing.
The BoE hinted at further easing if disinflation persists, suggesting the Bank Rate could decline gradually.
CME FedWatch Tool suggests pricing in a 67% chance of a cut in December, down from 62% a day ago.

The BoE held interest rates steady at 4% on Thursday, as expected, but the vote indicated a dovish tilt, with four of the nine Monetary Policy Committee (MPC) members favoring a 25-basis-point cut to 3.75%.

BoE Policymakers Sarah Breeden, Dave Ramsden, Swati Dhingra, and Alan Taylor supported the reduction. The BoE signaled openness to further easing, stating that if disinflation progresses, the Bank Rate is likely to follow a gradual downward path.

The GBP/USD pair also faces challenges as the US Dollar (USD) rebounds after posting losses in the previous session. Traders will likely observe the preliminary Michigan Consumer Sentiment Index data on Friday, while the US government shutdown is restricting official data releases like Nonfarm Payrolls (NFP) and Unemployment Rate.

The US Dollar faced challenges as the Challenger Job Cuts report prompted the Federal Reserve (Fed) to lower interest rates at its December meeting. Fed funds futures traders are now pricing in a 67% chance of a cut in December, down from 62% a day ago, according to the CME FedWatch Tool.

Challenger, Grey & Christmas on Thursday, announced that companies cut over 153,000 jobs in October, marking the biggest reduction for the month in more than 20 years.

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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