The Pound Sterling (GBP) is demonstrating choppy moves around 1.2700 as investors are awaiting key Service PMI numbers after better-than-expected Manufacturing PMI data. The GBP/USD pair is non-directional as the market mood is broadly quiet due to the Independence Day holiday in the United States. Investors would keep their entire focus on interest rate guidance from Bank of England (BoE) policymakers.
The economic outlook for the United Kingdom is still solid as demand from households is upbeat despite higher interest rates by the Bank of England. While problems or BoE policymakers and the UK government are galloping as inflation looks extremely sticky above 8.5% and tight monetary policy is failing to do the expected job.
Pound Sterling is correcting toward the lower portion of the Rising Channel chart pattern in which pullback moves are considered as buying opportunities by the market participants. The Cable is holding the 20-period daily Exponential Moving Average (EMA), which indicates that the upside momentum is extremely solid.
Buyers could add positions if Cable corrects further to 1.2570 as a bargain buy opportunity would emerge. While upside bias could fade if it extends correction below the psychological support of 1.2500.
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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