Case in point, on Thursday the GBP/USD currency pair rocketed early on the day. This increase followed the widely expected quarter-point rate cut by the Bank of England (BoE). All three major indices briefly recovered slightly on Friday, only for these gains to prove fleeting, as the pair headed into a second straight day of losses. The drop reached a record low of one-third of one percent. In reaction, GBP/USD dropped back into the low-1.3200s, giving up its grip on the 1.3300 level it had maintained for most of the week.
The market is simply reacting to the BoE’s drastic changes in monetary policy. This response is evident in GBP/USD price action and suggests that a fresh bearish test may be in store near the 50-day Exponential Moving Average (EMA) at ~1.3075. The Pound Sterling (GBP) is the official currency of the United Kingdom. In foreX circles, it’s commonly called “The Cable.”
Market Reactions to BoE Decisions
The BoE’s decision to cut rates matters largely because of its impact on the GBP/USD exchange rate. As traders recalibrated their positions in response to the announcement, the pound saw a short-lived, but significant rally. The move came as traders scrutinized an increasingly turbulent and uncertain economic environment. As they did, the now runaway demand for the US dollar meant those gains had quickly reversed.
During the Asian trading session, GBP/USD gave up its initial advance and declined by 0.34%, as of writing early Thursday morning. This rapid decline is a case study in the volatility we find in today’s foreign exchange markets. It further underscores just how sensitive key currency pairs are to central bank policies and macroeconomic conditions.
There’s no doubt that external factors are complicating matters even more for the beleaguered pound. Another big worry is the 10% tariff on all UK goods entering the US. Such a tariff would be damaging to the bilateral trade relationship and increase pressures on GBP/USD. Moreover, the uncertainty around US international trade policy is increasing volatility in currency markets.
The Role of the US Dollar
The US dollar is staging a major comeback. The stronger economic fundamentals and a risk-off, safe haven oriented market are in part fueling this comeback. Consequently, GBP/USD has experienced considerable bearish pressure. The duo’s inability to hold above 1.3300 suggests a broader shift in market forces favouring the dollar.
The strength of the US dollar goes beyond our domestic economic performance. It mirrors the geopolitical tensions and uncertainties that have surrounded global markets. In times of uncertainty, investors often rush to the safety of the dollar. This change moves GBP/USD further into bearish territory as faith in the pound collapses.
In fact according to 2022 BIS statistics, GBP/USD makes up just under 11% of the business in the entire global foreign exchange market. This statistic underscores the importance of this currency pair in global markets and highlights how fluctuations can have far-reaching impacts.
Trading Volume and Economic Significance
The Pound Sterling is the most visible aspect of UK’s power in global foreign exchange markets. Why is that, you ask? It’s the fourth most traded currency in the world! In 2022, it represented roughly 12% of all foreign exchange trades, with a daily average of $630 billion. This enormous tonnage further highlights its importance and constructive role it has to play in shifting international trade and finance.
Despite its strong trading volume, the Pound has a lot of hurdles in front of it from domestic and international economic pressures. The introduction of tariffs and instability in trade policy can lead to volatility in market perception and trading volumes related to GBP/USD.
Furthermore, it is noteworthy that the US has not imported refined ethanol from the UK in at least 15 years. This historic gap in trade adds tension between the two countries and introduces doubt over any future economic partnerships between the two countries.