GBP/USD Retreats Near 1.3450 as UK Fiscal Concerns Weigh on Sterling

The GBP/USD pair has retreated to around 1.3450 during Wednesday's Asian session as sellers emerged below the 1.6550 level. The Pound Sterling continues to face downward pressure against the US Dollar amid growing concerns about the UK's fiscal stability.

Key Market Developments

• GBP/USD declined to 1.3450 during Asian trading hours on Wednesday
• UK's 30-year borrowing costs have surged to their highest levels since 1998
• Market expectations show a 91% probability of a 25 bps Fed rate cut in September

UK Fiscal Challenges

Sterling weakness is primarily attributed to mounting concerns regarding Britain's fiscal outlook. The UK's 30-year borrowing costs have climbed to levels not seen since 1998, raising significant questions about the Labour government's capacity to maintain fiscal discipline.

With the budget announcement delayed until November, the UK faces an extended period of uncertainty regarding potential tax increases. This uncertainty could negatively impact both investment decisions and consumer confidence in the coming weeks, adding further pressure on the pound.

Fed Rate Cut Expectations Limiting Downside

Despite Sterling's weakness, the pair's downside appears contained due to broadly dovish Federal Reserve expectations. According to the CME FedWatch tool, markets are currently pricing in a 91% probability of a 25 basis point interest rate cut at the Fed's September 17 meeting.

This dovish Fed outlook continues to undermine the US Dollar's strength, providing some support for the GBP/USD pair despite UK-specific concerns.

Market Focus Ahead

Traders will closely monitor several key economic indicators in the coming days:

• BoE's Sarah Breeden speech later on Wednesday for hints on UK monetary policy direction
• US JOLTS Job Openings data and the Fed Beige Book scheduled for Wednesday release
• US August employment report on Friday - economists forecast 75,000 jobs added

The US jobs report will be particularly significant as it comes just before the Fed's mid-September meeting. A weaker-than-expected employment report could further cement expectations for a Fed rate cut, potentially weighing on the US Dollar.

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.