GBP/USD continues its winning streak for the ninth consecutive day, trading around 1.3390 during the Asian hours on Tuesday. The currency pair rises as the US Dollar (USD) faces headwinds as market participants scale back expectations for Federal Reserve (Fed) rate hikes this month and in September. This shift in sentiment followed a cooling employment report that revealed fewer jobs added across April, May, and June than Wall Street had anticipated.
Furthermore, a recent drop in crude oil prices, driven by an OPEC+ production boost and a US-Iran peace deal, has alleviated broader inflationary pressures, softening the urgency for an aggressive Fed policy outlook.
The Greenback could find baseline support from hawkish remarks by Federal Reserve (Fed) Governor Christopher Waller and resilient domestic economic data.
Waller underscores flexible forward guidance and firm 2% inflation pledge
Fed’s Waller delivers a moderately stronger-than-usual performance, with a 7.1/10 FXS Speechtracker score compared to the established baseline of 6.4/10, emphasizing both the usefulness and the pitfalls of forward guidance. The focus on forward guidance as a “valuable tool” that can accelerate policy transmission, yet becomes a hindrance when too rigid or when facing multiple plausible economic paths, signals a preference for more flexible communication and reinforces the importance of a well-understood reaction function. Waller’s insistence on the credibility of the 2% inflation pledge, rejection of keeping rates low to aid deficit financing, and preference for an inflation target range (without changing the current target) collectively lean hawkish for the Dollar, even without explicit comments on the near-term outlook.
The FXS Fed Sentiment Index rose by 1.83 points to 125.72, confirming a move further into hawkish territory relative to the neutral 100 benchmark. This upward shift, aligned with the above-baseline FXS Speechtracker score, suggests markets will read Waller’s remarks as reinforcing the Fed’s anti-inflation stance and limiting expectations for policy accommodation, a backdrop that tends to support the Dollar against other major currencies.
Although business activity in the United States (US) services sector cooled slightly, it remained firmly in expansionary territory, with the June ISM Services Purchasing Managers’ Index (PMI) printing at 54.0 in line with consensus estimates. Within the sub-components of the report, the Prices Index dipped from 71.3 to 67.7, while the Employment Index saw a notable improvement, climbing out of contractionary territory from 47.9 to 51.2.
On the other side of the equation, the British Pound (GBP) could face its own pressures as markets lowered expectations for Bank of England (BoE) tightening. Investors are now pricing in just a 70% chance of a single rate hike this year, a sharp decline from the two increases anticipated just a few weeks ago.
While BoE Governor Andrew Bailey recently confirmed that inflation remains on track to hit the bank’s 2% target, he acknowledged it would take longer than previously forecast and firmly ruled out any imminent rate cuts.
This cautious approach follows the BoE’s June 18 monetary policy meeting, where officials voted 7-2 to hold the benchmark interest rate at 3.75%. Although the status quo is maintained, the hawkish camp has doubled since April, with two dissenting voters pushing for an immediate hike to 4.00%.
While UK inflation currently sits at 2.8%, the central bank’s internal projections indicate it could bounce back above 3% by autumn due to delayed war-era energy cost pass-throughs, leading major sell-side institutions to forecast the next rate hike around late 2026.
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, also known as ‘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.
Source: Original Article
