The GBP/USD pair attracts some sellers near 1.3760 during the early European session on Friday. The US Dollar (USD) edges higher against the Pound Sterling (GBP) after US President Donald Trump and Senate Democrats struck a deal to avoid a US government shutdown. Traders will keep an eye on the US Producer Price Index (PPI) data later on Friday.
The US Senate could vote as soon as Thursday night to approve a government funding package after Democrats reached a deal with Trump to strip out the full-year spending bill for the Department of Homeland Security (DHS). The Greenback gains ground against the GBP in an immediate reaction to this headline.
Trump said on Thursday he planned to announce his pick to replace Federal Reserve (Fed) Chair Jerome Powell on Friday, with speculation intensifying that the nod will go to former Fed governor Kevin Warsh.
“So overall, the market reaction, it’s been positive for the U.S. dollar because a Warsh appointment would not only play to the view that Fed independence will be protected, it would also play to the view that whilst some reforms should be expected, it’s not going to really dramatically change the Fed. And in particular, it’s also not going to necessarily mean that now we have a Fed that is at the whims of what President Trump or any other president would like them to do,” said Rodrigo Catril, Senior FX Strategist, National Australia Bank, Sydney.
The Bank of England (BoE) is expected to hold interest rates steady at 3.75% when policymakers meet next week, following a 25 basis points (bps) cut announced in the December policy meeting. Economists anticipate the next rate reduction to occur in April or June at the earliest, with an end-of-year rate projection of around 3.0% to 3.25%.
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.
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