The British pound/US dollar currency pair, known popularly as “Cable,” has rallied sharply. In the Asian session on Thursday, it was hovering around 1.3340. This action follows closely the introduction of a possible United States-United Kingdom trade deal. GBP/USD traded is the third most popular trading pair in the world, accounting for about 11% of all foreign exchange trades. Investors and traders alike pay very close attention to its performance.
The pound has turned stronger recently. This increase is a response to many factors, but notably the increasing interest rates in the UK, which make the pound attractive to international investors. As expected, the Federal Reserve decided today to hold interest rates firm at 4.25%-4.50%. Consequently, the US Dollar Index (DXY) has remained firm above 99.70, leaving a positive environment for GBP/USD.
The Importance of GBP/USD in Foreign Exchange Markets
GBP/USD is one of the most significant trading pairs in the currency markets, representing a vital link between the UK and US economies. The importance of this pair is exemplified by its huge percentage of all forex transactions.
Even with a scary challenge, the Pound Sterling is a remarkable currency. It is the oldest currency still in continuous use, first issued in 886 AD. The GBP has a deep legacy and is in the best state it’s been in since its inception. As a result, it represents 12% of all foreign exchange transactions, with an average of around $630 billion in daily trades as of 2022.
GBP/JPY, known as the “Dragon,” accounts for 3% of the FX daily transactions, while EUR/GBP accounts for an additional 2%. Each of these pairs has significant and important roles in the wider foreign exchange ecosystem.
Factors Contributing to GBP’s Strength
A few other crucial factors have played a hand in the recent rebound of GBP/USD. The top driver seems to be hope, or at least optimism, over what might come of future trade negotiations between the US and UK. President Donald Trump announced a major trade conference scheduled for tomorrow at 10:00 A.M. in The Oval Office, emphasizing the importance of these discussions.
“Big News Conference tomorrow at 10:00 A.M., The Oval Office, concerning a MAJOR TRADE DEAL WITH REPRESENTATIVES OF A BIG, AND HIGHLY RESPECTED, COUNTRY. THE FIRST OF MANY!!!” – US President Donald Trump
To take only the most recent example, higher UK interest rates have brought in foreign investors. They are hungry for higher yielding investments. This couldn’t come at a more opportune moment especially since the Federal Reserve just decided to hold interest rates steady.
Aside from interest rates, the weakening of the US Dollar bodes well for GBP/USD. As macroeconomic indicators in the US evolve, the Dollar could experience significant depreciation. Such a drop can result in boosting GBP inflation against it.
The Broader Economic Context
This rebound in GBP/USD comes amidst a bigger picture of shifting economic fortunes in the UK and US. The Bank of England is a vigorous promoter of “price stability.” This commitment is significant because it underlines its prioritization of bringing down inflation rates while fostering a strong economy.
Market participants are looking at the continuing debates regarding trade agreements and monetary policy changes in both countries. What they don’t know is what all those factors will look like over the next several weeks. According to analysts, if current trade negotiations yield positive results and help avoid a “hard Brexit,” the GBP may strengthen against the USD. In the interim, persistent interest rate differentials will continue to drive primary market dynamics.
GBP/USD is approaching some key resistance levels. Traders are always looking for breakouts or reversals that can set the tone for the market for weeks or months to come.