GBP/USD holds gains near 1.3500 amid BoE cautious stance

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GBP/USD extends its gains for the fifth consecutive day, trading around 1.3480 during the Asian hours on Thursday. The pair may further appreciate as the Pound Sterling (GBP) receives support from the cautious remarks from the Bank of England (BoE) officials.

GBP/USD appreciates as the Pound Sterling receives support from cautious remarks from BoE officials.
BoE's Catherine Mann warned that the risk of “higher-for-longer” inflation is materializing, highlighting persistent price pressures.
The September US Nonfarm Payrolls report will not be released on Friday, as the Labor Department has temporarily suspended operations.

BoE policymaker Catherine Mann said Wednesday that the risk of “higher-for-longer” inflation is materializing, emphasizing concerns over persistent price pressures. Mann added that keeping rates on hold is appropriate for the current period.

BoE Deputy Governor Clare Lombardelli warned on Tuesday that officials should not consider inflation shocks as temporary. Lombardelli stated that an increase in inflation could be from a one-off event, but its impact could prove to be more persistent.

The GBP/USD pair also draws support as the US Dollar (USD) struggles after the United States (US) government shutdown on Wednesday, after Congress failed to reach a funding deal. The September US Nonfarm Payrolls (NFP) report will not be released on Friday, as the Labor Department has paused virtually all activity.

The US ADP Employment Change report, released on Wednesday, showed that private sector payrolls declined by 32,000 in September and annual pay growth was up 4.5% year-over-year. This figure followed the 3,000 decrease (revised from a 54,000 increase) reported in August and came in below the market expectation of 50,000.

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.