The GBP/USD pair trades with mild gains near 1.3200 during the early European session on Friday. The British Pound (GBP) strengthens against the US Dollar (USD) as markets focus on who might become finance minister under Andy Burnham, and the latest US inflation data has softened expectations for US rate hikes.
UK Finance Minister Rachel Reeves is expected to be replaced under a Burnham-led administration. Traders focus on who might become finance minister under Andy Burnham, the likely successor to Keir Starmer as Prime Minister. “The obstacles to a Burnham coronation are slowly being cleared, offering sterling support at the margin,” said Nick Rees, head of macro analysis at Monex Europe.
Rees said former health secretary Wes Streeting’s emergence as the favorite to become her successor, as reported by some media outlets, was likely to support sterling. “That said, we are still in the honeymoon period as far as Burnham is concerned, and economic realities remain challenging,” he added.
The US Bureau of Economic Analysis (BEA) revealed on Thursday that the US Personal Consumption Expenditures (PCE) Price Index climbed 4.1% YoY in May, compared to 3.3% in April. The annual rate accelerated well above the Fed’s 2% target.
The core PCE, the Fed’s preferred inflation gauge, rose 3.4% YoY in May, versus 3.3% prior, in line with expectations. This figure registered the highest since October 2023. Both readings came in line with the market expectations.
Analysts believe that with oil prices falling to pre-war levels on Thursday after the US and Iran signed a preliminary peace deal, inflation likely peaked last month or is close to doing so.
Markets are now pricing in nearly a 28.9% chance for a hike of at least 25 basis points (bps) at the central bank’s July meeting, down from 34.2% in the prior session, according to the CME FedWatch tool. For the September meeting, expectations for a hike dipped to 60.1% from 65.7% on Wednesday.
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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