GBP/USD rebounds from 1.2750 as US Dollar declines due to rising odds of a Fed rate cut
- GBP/USD appreciates as the US Dollar corrects downwards due to the increased likelihood of a Fed rate cut in December.
- Traders await Thursday’s US Producer Price Index data for November to gain fresh impetus.
- UK RICS Housing Price Balance rose 25% in November, up from a 16% increase in October.
GBP/USD recovers its recent losses registered in the previous session, trading around 1.2770 during the Asian hours on Thursday. The GBP/USD pair gains ground as the US Dollar (USD) corrects downwards after breaking its four-day winning streak despite higher US Treasury yields.
The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades around 106.50 with 2-year and 10-year yields on US Treasury bonds standing at 4.16% and 4.28%, respectively, at the time of writing.
The US Dollar faces some challenges as the recent US CPI report seems not enough to keep the Federal Reserve (Fed) from cutting rates in December. The CME FedWatch Tool suggests nearly a 99% chance of Fed rate reductions by 25 basis points on December 18. Traders shift their focus on the US November Producer Price Index (PPI) for fresh impetus, which is due later on Thursday.
US Consumer Price Index (CPI) rose to 2.7% year-over-year in November from 2.6% in October. The headline CPI reported a 0.3% reading MoM, in line with the market consensus. Meanwhile, the core CPI, excluding volatile food and energy prices, climbed 3.3% YoY, while the core CPI increased 0.3% MoM in November, as expected.
In the United Kingdom (UK), the RICS Housing Price Balance surged 25% in November, up from a 16% rise in October, surpassing market expectations of a 19% increase. Released by the Royal Institution of Chartered Surveyors, this survey highlights trends in UK housing prices. It reflects the strength of the UK housing market, which often serves as an indicator of the broader economy due to its sensitivity to the business cycle.
The Pound Sterling (GBP) gains ground due to rising market confidence in the Bank of England (BoE) to keep its interest rates unchanged at 4.75% in December’s monetary policy decision. BoE policymakers are anticipated to vote to keep interest rates unchanged. Traders are likely to focus on the UK’s October monthly Gross Domestic Product (GDP) data due on Friday.
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.