GBP/USD strengthens above 1.3430 as traders weigh impact of US government shutdown

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GBP/USD trades with mild gains near 1.3435 in Friday’s Asian session.
US government shutdown impacts the US September employment report, which will be released on Friday.
BoE's Breeden said keeping interest rates high for too long is risky.

The GBP/USD pair posts modest gains around 1.3435 during the Asian trading hours on Friday. The US Dollar (USD) weakens against the Pound Sterling (GBP) as the US job market slows down and the government enters a shutdown. The US September Nonfarm Payrolls (NFP) report will not be published in light of the ongoing federal shutdown, while the ISM Services PMI, and the final S&P Global Services PMI should be released later on Friday.

Signs of a weakening US job market support the case for more interest rate cuts by the Fed in the remainder of the year, which provides some support to the Greenback. According to the CME FedWatch tool, traders have almost fully priced in that the Fed will cut interest rates by 25 basis points (bps) to the 3.75%-4.00% range in the policy meeting later this month.

The shutdown is likely to extend into next week. Senate Democrats are expected to block a GOP-backed short-term funding bill again when they vote tomorrow, and the Senate is not expected to be in session this weekend. Concerns over the impact of the US government shutdown might also contribute to the USD’s downside and act as a headwind for the major pair.

Bank of England (BoE) Deputy Governor Sarah Breeden warned of higher for longer interest rate risks, saying that a recent rise in headline inflation was unlikely to last and there were risks to the economy if interest rates are kept high for too long. Earlier on Tuesday, BoE Deputy Governor Clare Lombardelli said that the UK central banks should be careful about assuming that inflation shocks are temporary. Mixed signals from BoE policymakers could undermine the Cable against the US Dollar.

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.