The GBP/USD currency pair reached a peak not seen in ten weeks on Monday, with the British Pound testing levels above 1.3600 for the first time since July. This upward movement came as the US Dollar weakened across various currencies, amid investor anticipation for a crucial interest rate decision from the Federal Reserve (Fed) later this week.
As traders brace for the Fed’s upcoming rate call, they are keenly focused on whether the central bank will align with or exceed market expectations regarding potential rate cuts for the remainder of the year. An important component of this decision will be the Summary of Economic Projections (SEP), which includes the ‘dot plot’ outlining policymakers’ future rate expectations. Market speculation suggests that the Fed may enact three rate cuts by year-end, with nearly a 75% likelihood that rates could drop by 75 basis points before January, as indicated by the CME’s FedWatch Tool.
Simultaneously, the Bank of England (BoE) is set to announce its own interest rate decision on Thursday. Current forecasts suggest that the BoE will likely maintain its interest rates without changes, with a voting outlook of 7-to-2 in favor of the current stance. This decision comes against the backdrop of the UK’s Consumer Price Index (CPI) inflation data, also scheduled for release on Wednesday. Analysts expect a slight acceleration in inflation, projecting an annualized headline CPI of approximately 3.9%, compared to the previous period’s 3.8%. However, core UK CPI inflation is anticipated to slightly decline to 3.6% from 3.8%.
In addition, US Retail Sales figures for August are due to be released on Tuesday. While these figures are essential, their impact is likely to be muted as market participants remain focused on the Fed’s rate decision on Wednesday. Monthly retail sales are expected to show a decrease, easing from 0.5% to approximately 0.3%. This anticipated decline in retail sales may compound existing concerns, particularly in light of disappointing jobs data and troubling inflation metrics, as fears of an economic recession grow.
The Pound Sterling stands as the oldest currency still in use, having been established in 886 AD, and ranks as the fourth most traded currency globally, making up around 12% of all foreign exchange transactions. Its key trading pairs, particularly GBP/USD, account for a significant portion of foreign currency exchanges, with the Bank of England issuing the Pound.
Central to the value of the Pound Sterling is the monetary policy established by the Bank of England, which primarily aims for price stability, targeting an inflation rate of around 2%. The BoE adjusts interest rates as a method to control inflation. In cases of high inflation, rate hikes are intended to discourage borrowing, thus bolstering the Pound’s appeal to international investors. Conversely, a drop in inflation, suggesting economic stagnation, could prompt the BoE to lower rates to encourage borrowing and investment.
Economic data releases, including GDP, Manufacturing and Services PMIs, and employment figures, significantly influence the value of the Pound. Strong economic performance typically attracts foreign investment and may lead to interest rate hikes, which would further strengthen the Pound. Conversely, weak economic indicators may result in a depreciation of the currency.
Furthermore, the Trade Balance also plays a critical role in assessing the Pound’s strength, measuring the difference between a country’s export earnings and import expenditures. A favorable Trade Balance can enhance demand for the currency, while a negative balance can weaken it.
