The Pound Sterling (GBP) trades back and forth as investors await the UK CPI data for August, which will set an undertone for the Bank of England’s (BoE) September monetary policy decision. The GBP/USD pair consolidates as investors hope that a hawkish interest rate decision from the BoE will scrap its policy divergence with the Federal Reserve (Fed).
The UK economy is facing varied troubles due to BoE’s restrictive interest rate policy stance such as severely strong wage growth, and a labor market in which demand has started easing. The British economic outlook has turned vulnerable as the overall output is shrinking due to a deteriorating demand environment. The likelihood of reporting a technical recession by the UK economy is higher as more interest rate hikes from the BoE are already in the pipeline.
Pound Sterling is consistently defending the crucial support of 1.2440. The downside bias is still upbeat as the UK economy is struggling to absorb the burden of higher interest rates. The Cable consolidates near the 200-day Exponential Moving Average (EMA). The short-term trend is bearish as the 20 and 50-day EMAs are downward-sloping, and momentum oscillators portray strength in the bearish impulse.
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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