British Pound softens as UK political turmoil, hawkish Fed bets weigh

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The GBP/USD pair loses ground to near 1.3415 during the Asian trading hours on Tuesday. The British Pound (GBP) edges lower against the Greenback amid UK political turmoil. Traders will take more cues from the UK employment report, which is due later on Tuesday.

GBP/USD softens to around 1.3415 in Tuesday’s Asian session.
IMF raises the UK growth forecast but warns political turmoil could hurt growth.
Traders are pricing in an interest rate increase as soon as December.

UK Prime Minister Keir Starmer is facing a major leadership crisis following poor local election results on May 7, triggering a wave of high-level government resignations and severe market volatility. UK gilt yields have spiked to a 28-year high amid fiscal worries, exerting some selling pressure on the Cable sentiment.

The International Monetary Fund (IMF) on Monday raised its growth forecast for the UK economy this year but warned that further "domestic uncertainty," at a time when political instability is engulfing ‌the government, could hit spending and investment.

On the USD’s front, hotter-than-expected US inflation data have driven hawkish Federal Reserve rhetoric, lifting the US Dollar (USD). Traders in the fed funds futures market are pricing in a 35.0% chance that the US central bank will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

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.