GBP/USD softens below 1.3350 on renewed US Dollar demand

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The GBP/USD pair loses ground to around 1.3330 during the Asian trading hours on Thursday. The major pair retreats from nearly a two-month high amid renewed US Dollar (USD) demand. However, the rising bets of a Federal Reserve (Fed) rate cut next week might cap its downside.

GBP/USD weakens to near 1.3330 in Thursday’s Asian session.
Softer US economic data and the prospect of White House economic adviser Kevin Hassett could weigh on the US Dollar.
Traders remain confident that the BoE will cut rates in its next monetary policy announcement on December 18.

Weaker US economic data this week, including Manufacturing PMI and ADP Employment Change, have cemented the case for a rate reduction from the US central bank at the December meeting. This, in turn, could weigh on the Greenback and create a tailwind for the major pair.

Traders are currently pricing in an 89% probability of a quarter-point rate cut next week, according to the CME FedWatch tool, with an expected 89 basis points (bps) of easing by the end of next year.

US President Donald Trump said on Tuesday he plans to announce his choice to succeed Jerome Powell as head of the Fed early next year. Reuters reported that White House economic adviser Kevin Hassett has emerged as the frontrunner to be the next Fed chair. Hassett is seen as a close ally who supports Trump's call for quicker and deeper interest rate reduction to stimulate the economy, which might undermine the USD.

On the other hand, the UK Autumn November budget has reinforced bets for a December rate cut from the Bank of England (BoE), which could weigh on the Cable. UK Prime Minister Keir Starmer emphasized the need to bring inflation and interest rates down to boost business investment and economic growth. A majority of analysts expect the UK central bank to cut interest rates to 3.75% in December, with markets pricing in a 90% chance.

Elesewhere, BoE policymaker Catherine Mann said on Wednesday that US Dollar status as a global reserve currency could be undermined by the country's reduced support for its friends and military allies.

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.