GBP/USD consolidates above 1.3400 as softer USD offsets dovish BoE expectations

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The GBP/USD pair kicks off the new week on a subdued note following Friday's good two-way price swings and holds steady above the 1.3400 round figure during the Asian session.

GBP/USD struggles to gain any meaningful traction amid a mixed fundamental backdrop.
Fed rate cut bets and economic risks undermine the USD, lending support to spot prices.
Dovish BoE expectations and fiscal concerns act as a headwind for the GBP and the pair.

The GBP/USD pair kicks off the new week on a subdued note following Friday's good two-way price swings and holds steady above the 1.3400 round figure during the Asian session. Moreover, the mixed fundamental backdrop warrants some caution before positioning for an extension of the recent goodish recovery from the 1.3250-1.3245 region, or the lowest level since early August, touched last Tuesday.

The US Dollar (USD) struggles to capitalize on its gains registered on Friday amid expectations of further interest rate cuts by the US Federal Reserve (Fed) this year. Apart from this, economic risks stemming from a prolonged US government shutdown, global trade frictions, and signs of weakness in the US economy keep the USD bulls on the defensive. This, in turn, is seen as a key factor offering some support to the GBP/USD pair.

Meanwhile, disappointing UK employment details released last week fueled speculations that the Bank of England (BoE) could continue cutting rates gradually. Adding to this, worries about the UK’s fiscal outlook ahead of the crucial Autumn budget in November act as a headwind for the British Pound (GBP) and the GBP/USD pair. This, in turn, warrants some caution for bullish traders and positioning for any further gains.

Even from a technical perspective, Friday's failure near the 50% Fibonacci retracement level of the September-October downfall makes it prudent to wait for strong follow-through buying in order to confirm a near-term bottom for spot prices. Moving ahead, there isn't any relevant market-moving economic data due for release on Monday, either from the UK or the US, leaving the GBP/USD pair at the mercy of the USD price dynamics.

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.