On Thursday, GBP/USD rose 0.96% to settle near 1.3600 after a choppy session that saw the European morning cable test the 1.3455 area before a pointed bid was caught in New York in the afternoon. The daily candle left a long lower wick from the morning low, and the price stopped near the round value of 1.3600 until overdue in the session.
The Bank of England (BoE) left its key interest rate at 3.75% by an 8-to-1 majority, with chief economist Huw Pill, the lone dissenter, pushing for a 25 basis point enhance. Governor Andrew Bailey addressed second-round inflation risks during a news conference, signaling that the Monetary Policy Committee (MPC) is ready to act preemptively if energy-driven price pressures start to weigh on wages. On the US side, the personal consumption expenditure (PCE) price index rose 3.5% y/y in March, in line with forecasts, while preliminary gross domestic product (GDP) growth in the first quarter was 2% against the consensus of 2.3%, a softer tone that weighed on the dollar throughout the New York afternoon.
Friday’s session saw the Institute for Supply Management Manufacturing Managers Index (ISM Manufacturing PMI) with a consensus of 53 and a price paid sub-index forecast of 80, which would indicate continued cost pressure if confirmed. BoE chief economist Huw Pill also speaks on the European morning and may lean more hawkish than Bailey on Thursday given his vote for the hike. Apart from Friday, the UK calendar will be virtually empty next week, with Monday being a public holiday and no leading national publications. The situation in the U.S. is the opposite, headlined by the ISM Services PMI on Tuesday, the ADP employment change print on Wednesday, and culminating in the nonfarm payrolls (NFP) report next Friday, which will likely set the near-term direction for cable television.
GBP/USD, 4-hour chart
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 crucial 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 costly 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 sturdy 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 crucial 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.
