GBP/USD consolidates around 1.3330 as traders await Fed rate decision
- GBP/USD is seen consolidating its recent strong gains to the highest level since October 22.
- Dovish Fed expectations continue to act as a headwind for the USD and support the major.
- Bulls, however, seem reluctant and opt to wait for the FOMC rate decision on Wednesday.
The GBP/USD pair kicks off the new week on a subdued note and oscillates in a narrow trading band, around the 1.3320-1.3325 region, during the Asian session. Spot prices, however, remain close to the highest level since October 22, touched last Thursday, with bulls awaiting a sustained strength and acceptance above the 100-day Simple Moving Average (SMA) before placing fresh bets.
The US Dollar (USD) languishes near its lowest level since late October amid bets that the Federal Reserve (Fed) will cut interest rates again this week, and turns out to be a key factor that continues to act as a tailwind for the GBP/USD pair. Traders, however, seem reluctant to place aggressive directional bets and opt to wait for more cues about the Fed's future rate-cut path. Hence, the focus will remain glued to the updated economic projections and Fed Chair Jerome Powell's comments during the post-meeting press conference.
In the meantime, the end of the UK budget uncertainty helps offset bets that the Bank of England (BoE) will cut interest rates this month and benefits the British Pound (GBP), offering additional support to the GBP/USD pair. In fact, UK Chancellor of the Exchequer Rachel Reeves announced a tax hike amounting to an annual £26 billion to fund the fiscal hole, and made a buffer for unforeseen circumstances. This, in turn, favors the GBP bulls and suggests that the path of least resistance for spot prices remains to the upside.
Hence, any corrective pullback might now be seen as a buying opportunity and is more likely to remain limited. From a technical perspective, a move beyond the 100-day SMA barrier, currently pegged around the 1.3365-1.3370 region, will be seen as a fresh trigger for bullish traders and assist the GBP/USD pair to build on its recent move up witnessed over the past three weeks or so. In the absence of any relevant economic releases on Monday, traders will take cues from BoE MPC Member Alan Taylor's speech for some impetus.
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.