GBP/USD strengthens above 1.2550 ahead of US PCE inflation data

• GBP/USD gains traction to around 1.2570 in Wednesday’s early European session. 
• FOMC Minutes indicated a cautious approach to further rate cuts.  
• BoE’s Lombardelli said she needs to see more evidence before the next rate cut.

The GBP/USD pair trades on a stronger note near 1.2570 on Wednesday during the early European session. The Pound Sterling (GBP) consolidates despite US President-elect Donald Trump announcing more tariff measures. Traders brace for the release of US October Core Personal Consumption Expenditures (Core PCE) - Price Index for fresh impetus. 

Early Tuesday, Donald Trump pledged to impose tariffs on all products coming into the US from Canada, Mexico and China, which lifted the Greenback against the GBP in the previous session. The USD rally stalls on Wednesday as traders await the US Core PCE inflation data for more cues about the interest rate outlook. Meanwhile, the US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, currently trades near the lower end of its weekly range of around 106.85.  

However, the potential downside for the Greenback seems limited amid the less dovish remarks from Federal Reserve (Fed) officials. The minutes from the November FOMC meeting released Tuesday showed that Fed officials expressed confidence that inflation is easing and the labor market remains strong, allowing for further interest rate cuts albeit at a gradual pace. Fed policymakers emphasized that further rate cuts likely will happen, though they did not specify the timing and pace of reductions.

Most Bank of England (BoE) policymakers support a gradual policy-easing approach. The BoE Deputy Governor Clare Lombardelli said on Tuesday that she needs to see more evidence of cooling price pressures before she backs another interest rate cut. The lower bets that the UK central bank will cut interest rates next month provide some support to the GBP for the time being. 

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

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