- GBP/USD edges higher to 1.2655 in Monday’s early Asian session.
- The softer US PCE inflation data prompted speculation that the Fed will cut the rate this year.
- The Opposition Labor Party is expected to win over the UK Prime Minister Rishi Sunak-led Conservative Party.
The GBP/USD pair trades on a stronger note around 1.2655 during the early Asian session on Monday. The US Dollar (USD) edges lower as the US Personal Consumption Expenditures (PCE) Price Index for May eased to its lowest annual rate in more than three years, which provides some support to the major pair. Traders await the US June ISM Purchasing Managers Index (PMI) for fresh impetus, which is due on Monday.
The US core PCE, the Federal Reserve’s (Fed) preferred inflation measure, continued to cool in May, prompting speculation that the Fed will cut the interest rate this year. The core PCE figure climbed 2.6% from 2.8% in April, matching the forecast. The headline PCE increased 2.6% YoY in May from 2.7% prior, in line with the estimation.
The Fed officials emphasized in recent weeks that they will cut interest rates when they gain confidence that inflation has decelerated to the 2% target. New York Fed President John Williams said that inflation is still at problematic levels and the US central bank will act to lower it. Fed Governor Michelle Bowman noted that while current Fed policies should be enough to bring inflation back to target, adding that the central bank shouldn’t be unwilling to weigh further rate cuts if inflation data remains stubborn.
The general election in the United Kingdom will be held on Thursday and this event is likely to trigger the volatility in the pair. According to the latest exit polls, the Opposition Labor Party is expected to win over the UK Prime Minister Rishi Sunak-led Conservative Party.
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, 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.
