Pound Slides Toward Late-June Low as Dollar Gains

Key Moments

Dollar Strength Pressures Pound Ahead of NFP

The GBP/USD pair traded on the back foot during the Asian session on Friday, lingering near the previous day’s trough – its weakest level since June 26 – and remaining below the 1.3200 handle. The pair appeared on track to log modest declines for a third consecutive week as market participants turned their focus to upcoming U.S. labor market data for direction.

Attention centered on the widely watched U.S. Nonfarm Payrolls (NFP) release, which investors viewed as a key input for assessing the Federal Reserve’s next policy moves amid fading expectations for an interest rate increase in October. The outcome of the jobs data was seen as crucial for shaping short-term U.S. Dollar price behavior.

Macro Drivers: Yields, Oil, and Geopolitics

In the interim, the U.S. Dollar Index (DXY), which measures the performance of the Greenback against a basket of major currencies, held firm near a one-and-a-half-year high. Oil-related inflation concerns limited the extent of the overnight pullback in U.S. government bond yields from their multi-year highs, helping to maintain support for the Dollar.

Additional backing for the Greenback came from ongoing geopolitical tensions tied to the U.S.-Iran standoff, which continued to bolster demand for the safe-haven currency. At the same time, developments in the UK fixed income market weighed on the British Pound.

Yields on 30-year UK government bonds climbed above 6% for the first time since early 1998, amplifying fiscal nerves ahead of the Autumn Budget scheduled for October 28. These concerns added another headwind for Sterling and contributed to the downward bias in GBP/USD. Nonetheless, the downside appeared somewhat contained as traders were reluctant to initiate aggressive new positions before the imminent high-impact U.S. data release.

GBP/USD Technical Outlook

From a technical perspective, GBP/USD maintained a bearish short-term profile. The move and close below the 1.3200 threshold overnight opened the door for a potential slide toward a retest of the year-to-date low near the 1.3140 zone, which was reached in June. A break beneath that region would expose the 1.3100 round figure, and a clear move through 1.3100 would likely signal scope for an extension of the downtrend that has unfolded over roughly the last month.

On the topside, any rebound attempts were expected to encounter notable resistance just ahead of the 1.3300 level. The pair would need to show sustained strength above that barrier to support a more constructive outlook. If that scenario unfolded, GBP/USD could then look to challenge the 200-day Simple Moving Average (SMA), located at 1.3448, which is viewed as a key technical reference point.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Background: Pound Sterling and Key Drivers

The Pound Sterling (GBP) is described as the oldest continuously used currency globally, with origins dating back to 886 AD, and serves as the official currency of the United Kingdom. It is cited as the fourth most traded currency in the foreign exchange market, accounting for 12% of all FX transactions, with an average daily turnover of $630 billion according to 2022 data.

Major GBP pairs include GBP/USD, commonly called “Cable,” which represents 11% of foreign exchange activity, GBP/JPY – known as the “Dragon” among traders and accounting for 3% – and EUR/GBP at 2%. The Pound Sterling is issued by the Bank of England (BoE).

Bank of England Policy and Its Impact on GBP

Monetary policy decisions taken by the Bank of England are identified as the most important influence on the Pound’s valuation. The BoE bases its decisions on its main objective of achieving “price stability” through maintaining inflation near a 2% target, principally by adjusting interest rates.

When inflation runs above desired levels, the BoE seeks to temper it by raising interest rates, increasing borrowing costs for households and businesses. This is typically supportive for GBP because higher yields make UK assets more appealing to global investors.

Conversely, when inflation falls too low, signaling slowing economic momentum, the BoE may reduce interest rates to lower funding costs and stimulate borrowing and investment, which can weigh on the currency.

Role of Economic Data and Trade Balance

Economic releases are highlighted as important gauges of the UK’s underlying performance and can shift the Pound’s direction. Figures such as gross domestic product (GDP), Manufacturing and Services Purchasing Managers’ Indexes (PMIs), and labor market data can all influence Sterling.

Strong readings tend to support GBP by drawing in foreign capital and by potentially encouraging the BoE to consider tighter policy, while weak data generally exerts downward pressure. The trade balance is also flagged as a significant indicator, measuring the gap between export revenues and import spending over a given period.

Currencies of economies with highly demanded exports can gain from the additional demand created by foreign buyers converting into the local currency. As a result, a positive trade balance is associated with currency strength, while a negative balance can have the opposite effect.