GBP/USD struggles to capitalize on modest intraday gains above 1.3100

VaselineOctober 8, 2024

0 3 minutes read

GBP/USD struggles to capitalize on modest intraday gains above 1.3100

GBP/USD is gaining positive traction and cutting a five-day losing streak to a multi-week low.
A modest decline in the USD provides support for the pair, although a combination of factors limits gains.
Declining chances for aggressive Fed policy easing limits USD losses and acts as a headwind.

The GBP/USD pair is attracting some buyers during the Asian session on Tuesday and for now appears to have snapped a five-day losing streak to a near four-week low around the 1.3560 area reached the previous day. However, spot prices are struggling to build on the upside beyond the 1.3100 mark, warranting caution for bullish traders.

The US dollar (USD) remains depressed below the seven-week high reached on Friday and is proving to be a key factor providing support to the GBP/USD pair. That said, reduced bets for another excessive rate cut by the Federal Reserve (Fed), amid signs of a still resilient US labor market, could prevent USD bears from placing aggressive bets. Apart from this, a softer risk tone should act as a tailwind for safe haven money and limit upside for the currency pair.

Investors remain concerned that tensions in the Middle East could spill over into a wider conflict. In addition, less-than-optimistic comments from the National Development and Reform Commission (NDRC) – are overshadowing recent optimism driven by China’s stimulus bonanza and tempering investor appetite for riskier assets. This is evident from a generally weaker tone around equity markets, which in turn could drive some refuge flows to the USD and keep a lid on the GBP/USD pair.

Meanwhile, Bank of England (BoE) Governor Andrew Bailey said last week that there was a chance the central bank would become a little more aggressive in cutting interest rates if there was further good news on inflation. This could further limit gains for the British Pound (GBP) and suggest that the path of least resistance for the GBP/USD pair is to the downside. Therefore, any further move up could still be seen as a selling opportunity and risk a quick sell-off.

Moving forward, there is no relevant market-moving economic data due for release on Tuesday from either the UK or the US, leaving the USD and GBP/USD at the mercy of Fedspeak. The focus, meanwhile, remains on the release of the minutes of Wednesday’s FOMC meeting. This will be followed by the US Consumer Price Index (CPI) and Producer Price Index (PPI), which will play a key role in boosting USD demand and provide further impetus to the currency pair.

Frequently Asked Questions for Pounds Sterling

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 foreign exchange (FX) unit in the world, accounting for 12% of all trades, averaging $630 billion per day as of 2022. Its key trading pairs are GBP/USD, also known as “Cable”, which represents 11% of FX, GBP/JPY or “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).

The most important factor influencing the value of the pound sterling is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its main objective of “price stability” – a steady inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates. When inflation is too high, the BoE will try to control it 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 that economic growth is slowing. In this scenario, the BoE will consider cutting interest rates to reduce credit so that companies borrow more to invest in growth-generating projects.

Data releases measure the health of the economy and can affect the value of the pound. Indicators such as GDP, manufacturing and services PMI 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, it may encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, if the economic data is weak, the pound is likely to fall.

Another significant release of data for the pound is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports in a given period. If a country produces highly sought-after exports, its currency will only benefit from the additional demand created by foreign buyers looking to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

VaselineOctober 8, 2024

0 3 minutes read

Frequently Asked Questions for Pounds Sterling

Vaseline

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