The pound has made up most of the losses lost on Wednesday and is trading around 1.3830 in Thursday’s early session in London, having rebounded from lows at 1.3750 and four-year highs at 1.3870 relatively close.
The US dollar rebounded on Wednesday following a hawkish decision on the monetary policy of the Federal Reserve (Fed) and supporting comments from US Treasury Secretary Scott Bessent, but this did not result in any consequences. Inconsistent U.S. trade policy and attacks on the independence of the Federal Reserve continue to undermine confidence in the U.S. dollar.
The hawkish Fed does not support USD
The Fed left interest rates unchanged and improved its economic outlook, which confirmed the view of extending the pause. However, investors remain confident that the monetary easing cycle will resume once Trump replaces Chairman Powell with a more dovish Fed chief.
Additionally, U.S. Treasury Secretary Scott Bessent confirmed that Washington has a robust dollar policy and denied any coordinated plan with Japan to support the yen, a rumor that sent the U.S. dollar lower last week.
In the UK, a robust shop price index released on Tuesday provided some support for an already robust pound sterling, boosted by last week’s upbeat retail consumption and business activity data.
Looking ahead, UOB Group’s technical analysis team sees the Pound in a consolidation phase ahead of a further rise towards 1.3925: “The upside impulse indicates further upside risk, with Pound Sterling likely to rise to 1.3925 next (…) We will maintain the same view as long as Pound Sterling remains above 1.3710.”
Sterling FAQs
The pound sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. As of 2022, it is the fourth most traded currency unit in the world, accounting for 12% of all transactions, with an average value of $630 billion per day. Its key trading pairs are GBP/USD, also known as “The Cable”, which makes up 11% of FX, GBP/JPY or “The Dragon” as traders call it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most critical factor influencing the value of the pound sterling is the monetary policy pursued by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a constant inflation rate of around 2%. The basic tool to achieve this goal is to adjust interest rates. When inflation gets too high, the BoE will try to contain it by raising interest rates, making access to credit more exorbitant for citizens and businesses. 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 that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to lower borrowing prices so that companies borrow more to invest in projects that generate economic growth.
The published data are used to assess the condition of the economy and may affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMIs and employment can influence the direction of the GBP exchange rate. A robust economy is good for sterling. Not only will it attract more foreign investment, but it may prompt the BoE to raise interest rates, which will directly strengthen the British pound. Otherwise, if economic data is faint, sterling is likely to fall.
The next critical data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only benefit from the additional demand created by foreign buyers willing to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
