GBP/USD weakens to near 1.3150 as BoE rate cut expectations grow on weak UK data

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The GBP/USD pair declines to near 1.3155 during the early Asian session on Monday. The Pound Sterling (GBP) softens against the US Dollar (USD) amid concerns about the UK's fiscal debt and weak economic data from the UK.

GBP/USD softens to around 1.3155 in Monday’s early Asian session.
Weaker UK economic data has prompted the BoE to deliver another rate cut in December.
Analysts believe that the resumption of US economic data will show job market weakness and a potential slowdown.

The pound loses ground after a report that UK Prime Minister Keir Starmer and Finance Minister Rachel Reeves have dropped the plan to raise income tax rates, in a dramatic turn ahead of the budget on November 26.

Additionally, the recent UK economic data, including cooling wage growth and weaker Gross Domestic Product (GDP) data, have prompted further economic concerns and fueled bets on a December rate cut from the BoE. This, in turn, could weigh on the GBP in the near term. Bets for a 0.25 percentage point cut have surged to near 80% probability, according to Reuters.

On the other hand, traders brace for a backlog of US data following the government's reopening, which they expect will likely point to a weakening economy. This might drag the Greenback lower and create the tailwind for the major pair.

Financial markets are now pricing in nearly a 54% chance that the US central bank will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, down from a 62.9% probability that markets priced in earlier last week, according to the CME FedWatch Tool.

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.