GBP/USD consolidates in a range around 1.2570 area; upside potential seems limited
- GBP/USD struggles to capitalize on Friday’s bounce from a multi-month trough.
- The Fed’s hawkish tilt, elevated US bond yields and geopolitics underpin the USD.
- The BoE’s dovish outlook further holds back the GBP bulls from placing fresh bets.
The GBP/USD pair kicks off the new week on a subdued note and oscillates in a narrow trading range above mid-1.2500s during the Asian session. Moreover, the fundamental backdrop warrants caution before positioning for an extension of Friday's bounce from the 1.2475 area, or the lowest level since May.
The US Dollar (USD) pulled back from a two-year high on Friday after the Personal Consumption Expenditure (PCE) Price Index report for November pointed to signs of inflation moderation and lingering challenges for the economy. This keeps the USD bulls on the defensive and offers some support to the GBP/USD pair. That said, the Federal Reserve's (Fed) hawkish shift might continue to act as a tailwind for the safe-haven buck.
The Fed, as was widely anticipated, lowered borrowing costs by 25 basis points (bps) last Wednesday, though signaled a slower pace of rate cuts in 2025. This remains supportive of elevated US Treasury bond yields, which, along with geopolitical risks stemming from the protracted Russia-Ukraine war and tensions in the Middle East, supports prospects for the emergence of some USD dip-buying and might cap the GBP/USD pair.
Apart from this, the Bank of England's (BoE) split vote decision to leave interest rates unchanged last week and a dovish outlook might hold back traders from placing aggressive bullish bets around the British Pound (GBP). In fact, three members of the BoE's MPC voted to reduce rates, while policymakers downgraded their economic forecast for the fourth quarter of 2024. This might further contribute to keeping a lid on the GBP/USD pair.
Market participants now look to the BoE's Quarterly Bulletin for some impetus ahead of the Conference Board's US Consumer Confidence Index later during the early North American session. Nevertheless, the aforementioned fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has bottomed out in the near term.
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.