GBP/USD gathers strength above 1.3450 as Fed independence concerns pressure US Dollar
GBP/USD strengthens to around 1.3470 in Tuesday’s early European session. Renewed concerns over the Fed’s independence undermine the US Dollar against the Cable. Traders await the US December CPI inflation data on Tuesday for fresh impetus.The GBP/USD pair edges higher to near 1.3470 during the early European session on Tuesday. The Greenback weakens against the Pound Sterling (GBP) following the US Department of Justice's threat to indict Federal Reserve (Fed) Chair Jerome Powell over comments to Congress about a building renovation project.
Powell said on Sunday that the Fed has received subpoenas from the Justice Department over statements he made to Congress last summer on cost overruns for a $2.5 billion building renovation project at the central bank's headquarters in Washington.
He termed the threats a "pretext" for putting pressure on the Fed to lower interest rates. This headline raises concerns about the independence of the Fed, which exerts some selling pressure on the US Dollar (USD) and creates a tailwind for the major pair.
The Bank of England (BoE) cut its interest rate to 3.75% in the December policy meeting and is expected to implement further reductions in 2026 as inflation eases and UK labor market conditions remain weak, though officials note future decisions will be "closer calls.”
A dovish stance from the BoE could weigh on the Cable against the USD. Many analysts believe the UK central bank will hold rates steady in February, with the next 0.25% cut most likely to occur in March or April this year.
Traders will take more cues from the US December Consumer Price Index (CPI) inflation data, which will be released later on Tuesday. The headline and core US CPI are expected to show an increase of 2.7% YoY in December. These figures could offer some hints about the US interest rate path.
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.
