- GBP/USD declines to around 0.6520 in Wednesday’s Asian session.
- Fiscal worries weigh on the Pound Sterling.
- Growing conviction of a Fed rate cut might cap the downside for the pair.
The GBP/USD pair attracts some sellers near 0.6520 during the Asian trading hours on Wednesday. The Pound Sterling (GBP) weakens against the US Dollar (USD) amid concerns about the UK’s ability to keep its finances under control. The Bank of England (BoE) Sarah Breeden is set to speak later on Wednesday.
Britain’s 30-year borrowing costs rose to their highest levels since 1998, raising concerns about the Labour government’s ability to exercise fiscal constraint. With the budget unlikely to come until November, the UK faces weeks of speculation about tax increases, which might affect investment and consumer confidence. Fiscal worries and a gloomy economic outlook might exert some selling pressure on the Cable in the near term.
Nonetheless, a dovish tone from the US Federal Reserve (Fed) and expectations for a rate cut at the September Fed meeting might undermine the Greenback and help limit the major pair’s losses. Markets are pricing in a nearly 91% possibility of a 25 basis points (bps) cut at the Fed’s September 17 meeting, according to the CME FedWatch tool.
Traders will keep an eye on the US JOLTS Job Openings and the Fed Beige Book, which are due later on Wednesday. The attention will shift to the US August employment report on Friday. Economists estimated 75,000 jobs added in the US economy. This report will be closely watched as it precedes the Fed’s mid-September meeting. The surprisingly weak jobs report could encourage the US central bank to cut interest rates and weigh on the USD.
Pound Sterling FAQs
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).
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.
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.
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.
