The GBP/USD pair is trading in a stronger tone around 1.3305 during the early European session on Wednesday. The US dollar fell against the British pound, as the US Federal Reserve is widely expected to announce another interest rate cut on Wednesday. The UK monthly GDP report will be published later on Friday.
Markets had expected a roughly 90% chance that the US central bank would cut its benchmark overnight interest rate by 25 basis points at the conclusion of its two-day meeting on Wednesday. This will be the third rate cut this year, bringing the target range to 3.50%-3.75%.
However, traders expect a “tight cut” with cautious forward guidance. The Fed will likely signal a pause in early 2026 due to persistent inflation concerns and a still-resilient labor market. This, in turn, could provide some support to the US dollar and create headwinds for the major pair.
On the sterling front, concerns about rising overall tax levels following the announcement of the UK’s autumn budget, coupled with weak inflation and a cold labor market, add weight to the prospect of further shifts in BoE policy. Financial markets currently expect a high probability of about 88% for a quarter-point cut at the next Bank of England meeting in December after signs from economic data that inflation pressure is easing, according to Reuters.
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.
