British Pound holds near three-month lows, US Dollar shines as global yields surge
- GBP/USD edges up above 1.3200 on Friday but remains close to four-month lows, at 1.3180.
- Risk aversion amid the global bonds' selloff has boosted the US Dollñar across the board this week.
- Investors are looking from the sidelines on Friday, awaiting the release of the US Nonfarm Payrolls report.
The British Pound (GBP) shows marginal gains against the US Dollar (USD) on Friday, with the GBP/USD pair trading just above 1.3200, yet unable to take any significant distance from the four-week lows at 1.3180 hit on Thursday. The Pound is heading for its fifth consecutive weekly decline, with the safe-haven US Dollar buoyed amid a rout in global bonds, and with investors focused on the US Nonfarm Payrolls report, due later on the day.
US economy is expected to have created 90,000 new jobs in September, according to the market consensus, while the Unemployment Rate is seen steady at 4.1%. The ADP Employment Change report beat expectations on Wednesday and boosted hopes for a strong payrolls reading on Friday, although recent inflation data has cooled expectations of a Federal Reserve (Fed) interest rate hike in October.
Fed officials have contributed to cooling hopes of back-to-back rate hikes, although they have made it clear that monetary policy will be tightened further in the coming months. Dallas Fed President Lorie Logan said earlier on Friday that the bank will need to hike rates by at least 50 basis points to get inflation back on track, while Minneapolis Fed President Neel Kashkari reiterated his projections of one more rate hike before the year-end.
US Dollar remains firm as bond selloff deepens
The US Dollar, on the other hand, has been drawing support from the global bond rout, which has crushed investors' appetite for risk this week.
Strategists at Brown Brothers Harriman argue that the “upward trend in longer-term bond yields” largely reflects “a tighter expected policy path and rising real term premia – the compensation that investors require to hold longer-term bonds – with long-run inflation expectations still well anchored.”
Against this background, and with investors spooked away from the Euro amid the escalating French borrowing costs, the sharp EUR/USD decline has boosted the Greenback against its main peers.
In the UK, the calendar is void on Friday but, on Thursday, the S&P Global Manufacturing Purchasing Managers' Index (PMI) was revised lower, with output showing the weakest growth in the last six months. This partially offset the positive impact of Bank of England policymakers, including Governor Bailey, hinting at higher interest rates ahead, and put additional pressure on the Pound.
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.