The Pound Sterling (GBP) extends its winning streak against the US Dollar (USD) for the third trading day on Friday. The GBP/USD pair jumps to near 1.3470 during the European session as the US Dollar underperforms its peers due to trade frictions between the United States (US) and China, and accelerating Federal Reserve (Fed) dovish expectations on monetary policy for the remaining year.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades near the 10-day low around 98.10.
Trade relations between the two largest powerhouses of the world are going through a rough patch as Washington has imposed additional 100% tariffs on imports from China against Beijing’s export controls on rare earth minerals.
Meanwhile, the meeting between US President Donald Trump and Chinese leader Xi Jinping scheduled later this month in South Korea remains on track. “We are working on a meeting, President Trump will go on meeting with Xi,” US Treasury Secretary Scott Bessent said on Thursday. He added that Washington doesn’t want to “decouple with China”, but it cannot allow “bureaucrats in China to manage the supply chain, and manufacturing process for the rest of the world”.
Other leaders across the globe have also criticized China for adopting rare earths export control measures. “China’s decision on rare earths is wrong, and dangerous for world economy. I welcome a greater Group of Seven (G7) focus on where we get critical minerals from,” United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves said on Thursday.
Daily digest market movers: Pound Sterling exhibits mixed performance against its currency peers
- The Pound Sterling demonstrates a mixed performance against its major currency peers on Friday, with investors seeking fresh cues on whether the Bank of England (BoE) will cut interest rates again in the remaining year.
- BoE dovish expectations accelerated this week after the release of the UK labor market data for the three months ending in August. The data signaled that the jobless rate accelerated and the wage growth slowed down. The Unemployment Rate accelerated to 4.8%, the highest level seen since the three-month period ending in March 2021.
- According to money market consensus, traders expect the BoE to cut interest rates by 46 basis points (bps) this year.
- On the contrary, BoE Monetary Policy Committee (MPC) member Catherine Mann, an outspoken hawk, has argued against lowering interest rates further. Mann didn’t support further monetary expansion, citing that UK labor market conditions are weakening only at a moderate pace. “What has transpired is that the labour market has modestly loosened, but it is not falling off the cliff,” Mann said in an event in Washington on Thursday, Reuters reported.
- On the fiscal front, UK Chancellor of the Exchequer Reeves confirmed that the government is not going to increase the wealth tax in the upcoming Autumn Budget scheduled next week. However, she clarified that there would be further tax raises and cuts in public spending.
- In the US, the speculation for more than 50 basis points (bps) reduction in interest rates by the Federal Reserve (Fed) has intensified amid growing US labor market concerns. According to the CME FedWatch tool, traders have fully priced in at least a 50-basis-points (bps) rate cut in the remaining year and see a 19.6% chance that the Fed could cut borrowing rates by 75 bps.
Technical Analysis: Pound Sterling jumps to near 1.3470
The Pound Sterling gains further to near 1.3470 against the US Dollar on Friday. The GBP/USD pair strives to extend its recovery above the 20-day Exponential Moving Average (EMA), which trades around 1.3423.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, which indicates a sideways trend.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 will act as a key barrier.
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.
