The Pound Sterling (GBP) surrendered gains as the S&P Global reported a contraction in the United Kingdom's Manufacturing PMI for the 14th time in a row and the US Dollar rebounded ahead of Federal Reserve (Fed) Governor Jerome Powell's speech.. The GBP/USD pair is struggling to improve the United Kingdom’s learning curve in handling the repercussions of higher interest rates by the Bank of England (BoE). The BoE has paused its policy-tightening spell after raising them to 5.25% to safeguard the economy from further slowdown.
A sheer volatility is anticipated in the Pound Sterling ahead as UK Finance Minister Jeremy Hunt is expected to raise the minimum wage and ignore tax cuts at the annual Conservative Party conference.
The Pound Sterling reverses to the six-month low near 1.2110 as risk-off mood rebounds. The outlook for the GBP/USD pair weakens and is expected to surrender gains. The GBP/USD pair discovered buying interest as momentum oscillators turned oversold. The Cable could deliver a mean-reversion move to near the 20-day Exponential Moving Average (EMA) at 1.2340. The broader bias remains weak as the Cable is trading below the 200-DEMA, which trades around 1.2465.
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, aka ‘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.
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