The GBP/USD pair is trading with moderate gains near 1.3060, snapping a four-day losing streak, during the early European session on Thursday. Markets may turn cautious later in the day ahead of the delayed September US Non-Farm Payrolls (NFP) report.
The UK CPI fell to 3.6% year-on-year in October from 3.8% in September, national statistics showed on Wednesday. This number was in line with market consensus. Inflation data reinforced expectations that the Bank of England may cut interest rates in December, which could undermine sterling in the near term. The upcoming government budget on November 26 is also expected to influence the Bank of England’s next move.
Attention will turn to US labor market data, which is scheduled to be released later on Thursday. The data release was delayed due to a 43-day government shutdown that ended last week. The shutdown complicated the Fed’s assessment of the labor market.
Economists expect the report to show that the United States added about 50,000 new jobs in September. Average hourly earnings are expected to rise 0.3% month-over-month in September, while the unemployment rate is expected to remain at 4.3%. If the report shows a weaker than expected result, this could drag the US dollar lower and create tailwinds for the major pair.
The Federal Open Market Committee (FOMC) released minutes from its October meeting on Wednesday, indicating “strongly divergent views” on what policy decision is appropriate for the December meeting. A majority of officials supported further interest rate cuts overall, and many participants indicated that it may be appropriate to keep interest rates steady for the rest of the year.
Frequently asked questions about the pound sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most popular foreign exchange (FX) trading unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to data for 2022. The main trading pairs are GBP/USD, also known as “Cable”, which accounts for 11% of FX, GBP/JPY, or “Dragon” as traders know it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary objective of “price stability” – a stable inflation rate of around 2%. The primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it more expensive for individuals and businesses to obtain credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to reduce the cost of 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 British pound. Indicators such as GDP, manufacturing PMIs, services and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the British pound is likely to fall.
Another important data release for the British Pound is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly sought-after exports, its currency will take full advantage of the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
