GBP/USD holds losses near 1.3450, downside seems limited amid BoE cautious stance

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GBP/USD loses ground after two days of gains, trading around 1.3470 during the Asian hours on Tuesday.

GBP/USD may recover as the Pound Sterling strengthens amid market caution over the BoE policy stance.
Kansas City Fed President Schmid emphasized that the Fed must uphold its inflation-fighting credibility, noting that inflation remains excessively high.
According to the CME FedWatch Tool suggests pricing in a 94% probability of a Fed rate cut in October.

GBP/USD loses ground after two days of gains, trading around 1.3470 during the Asian hours on Tuesday. However, the pair may regain its ground as the Pound Sterling (GBP) could gain ground, driven by the market caution regarding the Bank of England’s (BoE) policy stance amid sticky inflationary pressures and cooling labor market conditions.

The BoE projected at the August policy meeting that inflation would peak around 4% in September. However, Deputy Governor Clare Lombardelli and MPC member Catherine Mann cautioned last week that the recent inflation shocks should not be viewed as temporary.

The GBP/USD pair also depreciates as the US Dollar (USD) extends its gains, probably following the hawkish remarks from the Kansas City Fed President Jeffrey Schmid on Monday. Schmid said that the Federal Reserve (Fed) must maintain its inflation credibility and stressed that inflation is too high. He added that monetary policy is appropriately calibrated.

However, the US Dollar may struggle amid increased likelihood of further Federal Reserve (Fed) rate cuts and ongoing government shutdown. The CME FedWatch Tool suggests that markets are now pricing in a 94% chance of a Fed rate cut in October and an 84% possibility of another reduction in December.

The White House backed off US President Donald Trump’s claim on Monday that government employees were already being laid off due to the shutdown but cautioned that job losses could occur as the impasse appeared likely to extend into a seventh day. Meanwhile, the Republican-led Senate rejected competing funding measures for federal agencies for the fifth time, per 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.