British Pound recovers ground amid soft USD, upbeat PMI, and tariff reprieve
- GBP/USD rises modestly on Wednesday, trimming Tuesday’s decline.
- The UK was granted temporary relief from 50% US steel and aluminium tariffs.
- The US Dollar holds firm near recent highs ahead of ADP Employment Change data.
The British Pound (GBP) edges higher against the US Dollar (USD) on Wednesday, paring Tuesday’s losses as the Greenback softens slightly ahead of key US labor market data. GBP/USD is seeing modest gains after the US Dollar rallied over 0.50% in the previous day, supported by stronger-than-expected JOLTS Job Openings figures that boosted confidence in the labor market.
At the time of writing, the pair is trading around 1.3522 during the European session, but remains stuck within a familiar range between 1.3450 and 1.3600. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is holding steady near Tuesday’s high, hovering around 99.20. Traders are awaiting the ADP Employment Change report, due later on Wednesday, for fresh direction.
The British Pound found some underlying support from upbeat UK Purchasing Managers Index (PMI) data released earlier in the day. The S&P Global Composite PMI rose to 50.3 in May, up from a preliminary 49.4 and April’s 48.5, while the Services PMI climbed to 50.9, suggesting a weak but marginal growth.
Adding to the mildly positive tone, the UK has been granted temporary relief from the steep 50% US steel and aluminium tariffs that came into effect this Wednesday. Under an executive order signed by US President Donald Trump on Tuesday, the UK will be treated differently following a preliminary trade agreement reached last month, although the deal has yet to be finalized. For now, levies on UK imports will remain at the previous 25% level, offering near-term relief for British exporters. However, London faces a five-week deadline to formally conclude the deal or risk being hit by the full 50% tariff, keeping trade uncertainty alive.
Attention now turns to the US ADP Employment Change report, which will provide an early indication of private sector hiring ahead of Friday’s official Nonfarm Payrolls data. A strong print could reinforce expectations of a resilient US labor market, potentially supporting the US Dollar. Conversely, a downside surprise may renew speculation around a Federal Reserve (Fed) interest rate cut in the coming months, weighing on the Greenback and boosting demand for risk-sensitive currencies like the British Pound.
Pound Sterling FAQs
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).
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.
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.
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.