The British Pound, a cornerstone of the global foreign exchange market, remains a currency of significant influence. As the fourth most traded currency worldwide, it accounts for 12% of all foreign exchange transactions, averaging $630 billion daily based on 2022 data. This currency, with its origins tracing back to 886 AD, serves as the official currency of the United Kingdom. Its value is predominantly shaped by the monetary policy of the Bank of England, which recently reduced its key borrowing rates by 25 basis points to 4.5%. This decision comes amid a halved UK GDP growth forecast to 0.75% for the year and a decrease in the unemployment rate to 4.0%. Additionally, the GBP/JPY trading pair witnessed a rebound to 189.50 during Friday's North American session after touching a four-month low of 188.00.
The Pound Sterling’s stature as the oldest currency in existence underscores its historical significance and enduring relevance in modern finance. As the official currency of the United Kingdom, it operates under the monetary policy dictates of the Bank of England. The central bank’s primary objective is to maintain price stability, targeting a steady inflation rate of approximately 2%. In line with this goal, the Bank of England continually evaluates economic indicators to guide its monetary policy decisions.
A crucial aspect influencing the Pound's value is the trade balance. A positive net trade balance typically strengthens a currency, while a negative balance can have the opposite effect. For the British Pound, key trading pairs include GBP/USD, GBP/JPY, and EUR/GBP. Among these, GBP/USD is particularly notable, accounting for 11% of foreign exchange transactions, whereas GBP/JPY accounts for 3%.
Recent developments have seen the Bank of England reduce its key borrowing rates by 25 basis points to 4.5%. This move reflects the central bank's response to current economic conditions, including its decision to halve UK GDP growth expectations for the year to 0.75%. The reduction in borrowing rates aims to stimulate economic activity by making credit more accessible.
Alongside these adjustments, the unemployment rate has shown a slight improvement, ticking lower to 4.0% from 4.1%. This decline is a positive sign for the labor market, indicating potential stability despite broader economic challenges.
In the foreign exchange market, attention has centered on the GBP/JPY trading pair. The pair saw a resurgence to near 189.50 in Friday's North American session following a dip to a four-month low of 188.00 earlier in the day. Technical indicators such as the 14-day Relative Strength Index (RSI) suggest that downside momentum persists, with its values sliding into the 20.00-40.00 range. This indicates potential continued pressure on the pair.
Moreover, the 20-day Exponential Moving Average (EMA) for GBP/JPY is currently trading around 192.10 and is sloping downwards. This trend highlights ongoing volatility and uncertainty in currency markets as traders react to economic data and policy shifts.
The Bank of England’s monetary policy decisions remain pivotal in determining the Pound's trajectory. Its commitment to achieving price stability through inflation targeting continues to guide its actions amidst evolving domestic and international economic landscapes.