GBP/USD remains subdued below 1.3150 ahead of UK flash Q3 GDP data

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GBP/USD remains subdued for the third successive session, trading around 1.3120 during the Asian hours on Thursday. Traders await the United Kingdom (UK) flash Gross Domestic Product (GDP) data for the third quarter due later in the day.

GBP/USD edges lower as the Pound Sterling loses on the dovish BoE policy outlook.
The US Dollar strengthens amid rising optimism that the prolonged US government shutdown may be resolved this week.
Atlanta Fed President Raphael Bostic warned that loosening monetary policy prematurely could “feed the inflation beast.”

The Pound Sterling (GBP) faced challenges against its peers amid growing expectations that the Bank of England (BoE) will cut interest rates in December. BoE policymaker Megan Greene stated on Tuesday that wage settlement data for next year is higher than desired and expressed concern about persistent inflation in the UK, suggesting that monetary policy may need to be more restrictive.

The GBP/USD pair also struggles as the US Dollar (USD) advances amid optimism that the prolonged US government shutdown could be resolved this week. The House of Representatives voted 222 to 209 to approve a funding package and end the longest government shutdown in US history on Wednesday. The Bill is now clear to be signed by US President Donald Trump. Earlier this week, Trump already backed the bipartisan deal to end the impasse.

The bill’s approval will release a tranche of economic data pending release, except for October’s inflation and jobs data. White House Press Secretary Karoline Leavitt said on Wednesday that the October jobs and inflation data reports are unlikely to be released.

The US Dollar also gained support from hawkish Fedspeak, which decreased the odds of a Federal Reserve (Fed) rate cut in December. The CME FedWatch Tool shows markets pricing in nearly a 60% chance of a 25-basis-point Fed rate cut in December, down from 67% a day ago.

Federal Reserve (Fed) Bank of Atlanta President Raphael Bostic addressed economic trends at the Atlanta Economic Club on Wednesday. Bostic cautioned that easing policy too soon could “feed the inflation beast,” while noting that a sharp downturn in the labor market is unlikely in the near term.

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.