GBP/USD falls to six-month lows near 1.2550 ahead of PMI figures from both economies

• GBP/USD continues to lose ground as the US Dollar appreciates ahead of the PMI release on Friday.
• The unexpected drop in US Initial Jobless Claims has fueled the expectations of slower Fed rate cuts.
• The UK GfK Consumer Confidence Index increased by 3 points to -18, representing its first improvement in three months.

GBP/USD extends its losses for the third successive session, trading around 1.2580 during the Asian hours on Friday. This downside is attributed to the stronger US Dollar (USD) as traders continued to evaluate the Federal Reserve's (Fed) monetary policy outlook following the unexpected drop in US Initial Jobless Claims.

The US Dollar Index (DXY), which tracks the USD against a basket of major currencies, trades near 107.00, just below its fresh yearly high of 107.15 recorded on Thursday. The US Dollar strengthened after the release of the previous week's US Initial Jobless Claims data.

US Jobless Claims fell to 213,000 for the week ending November 15, down from a revised 219,000 (previously 217,000) in the prior week and below the forecast of 220,000. This development has fueled speculation about a slower pace of Fed rate cuts.

Futures traders now see a 57.8% chance of the Federal Reserve cutting rates by a quarter point, down from around 72.2% last week, according to data from the CME FedWatch Tool.

In November, the GfK Consumer Confidence Index in the United Kingdom (UK) rose by 3 points to -18, up from the previous reading of -21, marking its first improvement in three months. This increase comes as a result of lower interest rates, rising wages, and reduced concerns over tax hikes.

On Friday, traders will be looking ahead to the S&P Global Purchasing Managers’ Index (PMI) data for both countries. Additionally, UK Retail Sales figures for October and the final Michigan Consumer Sentiment report will also be closely monitored.

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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