GBP/USD saw a strong increase of three-quarters of a percent on Tuesday as the Greenback weakened due to softer US Producer Price Index (PPI) inflation figures. Despite the rise, UK unemployment claims hit their highest level since the pandemic, painting a mixed picture for the Pound Sterling.
Forex Today: Rate cut expectations tied to US inflation data
Upcoming Consumer Price Index (CPI) inflation figures on Wednesday will be closely watched, with expectations for a decrease in both core UK CPI and core US CPI. The UK is facing a challenging employment landscape, with a significant increase in unemployment claims in July. On the other hand, US PPI inflation dropped below expectations, leading to speculation of a double rate cut by the Federal Reserve in September.
GBP/USD Price Forecast
GBP/USD is on a recovery rally, supported by technical factors and weakness in the US Dollar. While the long-term trend favors buyers, the pair still needs to break above the 1.2900 handle to confirm a sustained upward movement.
GBP/USD Daily Chart
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.
Overall, the current market conditions suggest a potential rate cut by the Federal Reserve in September, while the UK faces challenges in its labor market. Investors should keep an eye on upcoming inflation data and employment figures to gauge the future direction of GBP/USD.