British Pound holds firm near 1.3380 amid broad-based US Dollar weakness

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The British Pound (GBP) appreciates against the US Dollar (USD) on Friday, on track for a 1.3% appreciation this week, its strongest weekly performance in three months.

GBP/USD trades near two-week highs at 1.3385, on track for a 1.3% weekly gain.
Soft US employment data has cooled hopes of Fed tightening undermining demand for the USD.
In the UK, confidence in the new cabinet's fiscal responsibility has kept the pound bid this week.

The British Pound (GBP) appreciates against the US Dollar (USD) on Friday, on track for a 1.3% appreciation this week, its strongest weekly performance in three months. The GBP/USD pair is trading at 1.3370 with downside attempts limited, as the US Nonfarm payrolls disappointment has undermined speculative demand for the US Dollar.

Data released by the US Bureau of Labour Statistics on Thursday revealed that US payrolls grew by 57K in June, just above half of the 110K increase forecasted by the market. Beyond that, May’s data was revised down to a 129K increase from the previous 172K, and the Labour Force Participation Rate fell to 621.5%, its lowest level in the last five years.

Traders scale back Fed hiking bets

These figures cooled market expectations of immediate Federal Reserve (Fed) rate hikes, pushing US Treasury yields down and dragging the US dollar with them. Futures markets are now pricing a 17% chance of a quarter-point rate hike in July and a 53% chance of a tightening move in September, down from 28% and 65%, respectively, ahead of the payrolls data release.

In the UK, the uncertain political scenario might be weighing on Sterling’s recovery, although Andrew Burnham, the best-positioned candidate to replace Keir Starmer as prime minister, has reiterated that he will play by Chancellor Reeves’ fiscal rulebook, which has soothed investors.

Beyond that, the UK calendar shows the final reading of June’s S&P Global Services Purchasing Managers’ Index as the main attraction on Friday. Preliminary data showed that business activity in the sector eased to 48.7 points from 49.3 in May.

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.