British Pound gains as US Dollar weakens despite Fed rate hike odds surge
- GBP/USD rises as expected mild US inflation data should keep the Fed on hold.
- US Nonfarm Payrolls jumped 162,000, raising expectations for a September Fed rate increase to nearly 58.3%.
- Persistent inflation and fiscal concerns drive market expectations for additional Bank of England rate hikes.
GBP/USD inches higher after posting minor losses in the previous day, trading around 1.3520 during Asian hours on Monday. The currency pair gains ground as the US Dollar (USD) struggles, possibly driven by a Goldman Sachs report emphasizing that this week's inflation data will be pivotal. Goldman Sachs expects a benign Consumer Price Index (CPI) reading to keep the Federal Reserve (Fed) on hold, even though August's solid job numbers removed one key obstacle to a potential rate increase.
According to the US Bureau of Labor Statistics (BLS), Nonfarm Payrolls (NFP) rose by 162,000 in August, easily beating market expectations of 56,000 and accelerating from an upwardly revised 21,000 increase in July. Meanwhile, the Unemployment Rate held steady at 4.1%.
Despite the Greenback's current weakness, its downside may be limited as strength in the labor market prompted traders to boost their rate hike expectations for September. The CME FedWatch tool shows the odds of a 25-basis-point Fed rate hike rising to nearly 58.3%, up from 50.2% before the jobs report.
Across the Atlantic, markets are fully pricing in a Bank of England (BoE) rate hike by the end of the year, with another increase anticipated by March 2027 due to ongoing concerns over UK fiscal sustainability and sticky inflation.
Pound support underpinned as BoE tone turns more hawkish
Analysts at Scotiabank highlight that recent commentary from BoE officials has become more supportive for the British Pound, noting that “messaging from MPC policymakers has taken a somewhat hawkish turn.” They point in particular to “notable comments from Chief Economist Huw Pill,” who is seen “seeking to manage the extent of pricing favored by markets while still leaning toward hikes overall,” a combination that, in Scotiabank’s view, helps underpin expectations for further policy tightening and offers a constructive backdrop for GBP performance.
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.
