The Pound Sterling, the oldest currency in the world, has seen a significant shift in its valuation in recent days. As the official currency of the United Kingdom, the Pound Sterling is a major player in the global foreign exchange market. Currently, it is the fourth most traded currency unit, accounting for 12% of all foreign exchange transactions with an average daily trading volume of $630 billion. However, recent developments have led to fluctuations in its value, particularly against the US Dollar.
In Monday's European session, the Pound Sterling traded significantly lower, nearing 1.2250 against the US Dollar. This decline is occurring amid expectations that the Bank of England will reduce interest rates by 25 basis points to 4.50%. The monetary policy decided by the Bank of England is the single most important factor influencing the value of the Pound Sterling. The anticipated rate cut comes in response to various economic indicators that have highlighted both challenges and areas of improvement within the UK's economy.
Recent labor market data for the three months ending in November showed an addition of 35,000 new workers to the economy. Despite this positive development, there are concerns about inflation. The UK's core Consumer Price Index (CPI) decelerated to 3.2% in December, a factor that has contributed to the Bank of England's decision-making process regarding interest rates. The Bank aims to achieve its primary goal of "price stability," which is defined as maintaining a steady inflation rate of around 2%.
Additionally, the ISM Manufacturing PMI for the UK is estimated to have improved to 49.5. Although this represents an improvement, it remains below the crucial 50.0 threshold that separates expansion from contraction in the manufacturing sector. These mixed signals from various economic indicators have added complexity to the Bank of England's task of setting appropriate monetary policy.
The trading pairs that are most significant for the Pound Sterling include GBP/USD, GBP/JPY, and EUR/GBP. In recent times, the US Dollar Index (DXY) has rallied above 109.50, marking its highest level in over two weeks. This rally has exerted downward pressure on the Pound Sterling, contributing to its current lower trading levels against the US Dollar.
The Bank of England issues the Pound Sterling and bases its interest rate decisions not only on inflation targets but also on other significant data releases, such as the Trade Balance. These factors collectively influence the currency's performance in international markets.