GBP/USD holds positive ground above 1.3550 as potential Fed rate cut looms

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The GBP/USD pair posts modest gains near 1.3555 during the early Asian session on Monday. Traders expect the US Federal Reserve (Fed) to deliver its first rate cut of the year at its policy meeting on Wednesday, which might weigh on the US Dollar (USD).

GBP/USD trades with mild gains around 1.3555 in Monday’s early Asian session.
Investors bet on a Fed interest rate cut on Wednesday.
UK GDP growth remained stagnant in August, as expected.

Bets are strongly in favor of a Fed rate reduction at the September meeting on Wednesday, fueled by recent evidence of a weakening labor market. According to the CME FedWatch tool, traders are now pricing in a near 100% probability of a quarter-point rate cut at the upcoming meeting. A small minority even sees a possibility of a jumbo rate cut.

Fed officials, including Chair Jerome Powell, have made it clear that future policy decisions will be data-dependent. The attention will shift to the Summary of Economic Projections (SEP), which might give insight into economic forecasts and their views on the appropriate Federal Funds Rate path ahead. Any dovish remarks from the Fed could weigh on the Greenback and act as a tailwind for the major pair.

On the other hand, the downbeat UK Gross Domestic Product (GDP) and factory data for July might exert some selling pressure on the Pound Sterling (GBP). Concerns over UK economic growth are likely to prompt traders to raise bets supporting more interest rate cuts by the Bank of England (BoE) in the remainder of the year. Markets have priced in around a 33% odds that the UK central bank will reduce borrowing rates one more time this year, according to Reuters.

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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