British Pound weakens to near 1.3500 on Fed hike bets
- GBP/USD softens to around 1.3505 in Monday’s early European session.
- Markets priced in an 86.7% odds of a rate increase on Wednesday, CME FedWatch tool showed.
- BoE is expected to keep interest rates unchanged at its September meeting on Thursday.
The GBP/USD pair declines to near 1.3505 during the early European session on Monday. The US Dollar (USD) strengthens against the British Pound (GBP) as traders pondered possible rate hikes from the Federal Reserve (Fed) later on Wednesday. On Thursday, attention will shift to the Bank of England (BoE) interest rate decision.
Traders ramped up bets for a Fed rate hike after data on Friday showed US Consumer Price Index (CPI) inflation accelerated in August. According to the CME FedWatch tool, financial markets have priced in nearly an 86.7% chance of a quarter-point rate hike at the Fed's September meeting, up from 72% before the US PPI data.
Fed Chair Kevin Warsh’s press conference will be closely watched as it might offer more clues about the US interest rate path. Strategists at Commonwealth Bank of Australia said that Warsh will need to match his tough rhetoric with policy action or risk further undermining his credibility on controlling inflation.
"There is a small chance the USD eases if the FOMC hikes, but Warsh plays down the risk of follow-up hikes in the press conference," said strategists at Commonwealth Bank of Australia.
On the Cable front, most economists expected the BoE to hold rates at 3.75% at its next meeting on Thursday. BoE Governor Andrew Bailey said last week that he wanted to dispel the idea that it's just a matter of time before the central bank raises interest rates, rather than a possibility that hinges on economic and geopolitical developments.
BoE caution persists as markets price hikes, leaving Pound vulnerable
Analysts at Commerzbank argue that the latest data leave the Bank of England in a difficult signalling position. They note that “if growth seen in July continues into the coming months, this will likely prompt the Bank of England to consider interest rate rises.” However, they stress that “until then, however, uncertainty about the underlying growth momentum is likely to further reinforce the Bank of England's cautious stance on interest rate rises.” With markets having “recently been betting more heavily on rising interest rates,” Commerzbank warns there is “a corresponding potential for disappointment and thus downside risks for the pound.”
Technical Analysis: GBP/USD keeps a neutral tone in the near term
In the daily chart, GBP/USD is consolidating in the upper half of its recent range, holding above both the Bollinger Bands (20, 2) lower band and the 100-day simple moving average (SMA), which together suggest underlying demand on dips. However, price remains below the Bollinger SMA centerline, leaving the near-term tone neutral to slightly capped, while the Relative Strength Index (14) at 47 keeps momentum broadly balanced after losing its earlier bullish edge.
On the topside, initial resistance is located at the Bollinger SMA midline around 1.3560, with a stronger barrier at the Bollinger upper band near 1.3658, where rallies would likely meet profit-taking. On the downside, immediate support emerges at the Bollinger lower band at 1.3460 ahead of the 100-day SMA at 1.3445; a sustained break below this moving-average floor would weaken the current consolidation bias and open the door to a deeper corrective phase.
(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.