British Pound edges lower but remains close to multi-month top as USD awaits US PCE
- GBP/USD drifts lower during the Asian session on Wednesday, though it lacks follow-through.
- Receding Fed rate hike bets and hopes for Iran diplomacy cap the USD, supporting spot prices.
- Traders also seem hesitant ahead of the key US PCE data and Fed Chair Kevin Warsh’s speech.
The GBP/USD pair trades with a negative bias below mid-1.3600s during the Asian session on Wednesday, eroding a part of the previous day's strong gains. Spot prices, however, remain within striking distance of a six-month top, set last Friday, as traders keenly await the release of the US Personal Consumption Expenditures (PCE) Price Index data for a fresh impetus.
The crucial US inflation data, along with Federal Reserve (Fed) Chair Kevin Warsh's speech at the Jackson Hole Symposium on Friday, will be scrutinized for cues about the US central bank's interest rate path. Apart from this, developments surrounding the Middle East crisis would play a key role in determining the near-term trajectory for the US Dollar (USD) and the GBP/USD pair.
Fed communication gap clouds Dollar outlook
DBS Bank’s Philip Wee argues that recent moves in US yields are exposing a critical communication gap at the Fed. He writes that Kevin Warsh “needs to explain how a Fed without forward guidance intends to anchor expectations, how much tightening the Fed is prepared to tolerate through long-term yields, and the policy boundary between the Fed and the Treasury.” In Wee’s view, the lack of clear guidance on these issues is undermining confidence in the Dollar at a time when investors are already questioning the sustainability of higher US yields.
In the meantime, tamer US inflation data and a sluggish labor market have shifted expectations toward a policy hold at the September 15–16 FOMC meeting. Adding to this, the US Treasury's buyback strategy and easing inflationary fears due to a fall in crude oil prices lead to a further decline in US bond yields, which should undermine the USD and support the GBP/USD pair.
Two senior officials indicated that the Treasury could use its near $1 trillion General Account to fund its recently announced plans to increase buybacks of longer-term bonds. On the geopolitical front, Iran said that it had restarted talks with Oman to manage commercial shipping traffic through the Strait of Hormuz, dragging crude oil prices to a nearly two-week trough.
Meanwhile, the US offered Iran sanctions relief and an end to the naval blockade in exchange for reopening the Strait and halting attacks carried out by its regional proxies. This revived hopes for a diplomatic resolution to end the US-Iran war, further denting the Greenback's reserve currency status and warranting caution before placing aggressive bearish bets on the GBP/USD pair.
GBP/USD daily chart
Technical Analysis
The GBP/USD pair holds below the 1.3660-1.3665 supply zone, which if cleared, will be seen as a fresh trigger for bullish traders and pave the way for additional gains. The near-term bias, however, stays skewed to the upside, though a failure to make it through the said barrier would hint at a deeper move corrective slide below the 1.3600, back toward the mid-1.3500ss.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.