The British Pound hits new lows: what's behind this decline?

Accelerated Collapse of Cable

The GBP/USD pair is experiencing sustained deterioration. During Tuesday’s session, the British currency decisively broke through the 1.3100 barrier, accumulating a 0.9% loss in just one day. This downward trend is not anecdotal: in the last twelve consecutive sessions, the British Pound closed lower or unchanged on ten occasions, heading toward its third consecutive week of unidirectional declines. The technical outlook paints a challenging scenario for those trading the world’s oldest currency pair, which has a daily trading volume of around 630 billion dollars.

The British Pound and its Role in Global Markets

Before delving into the current situation, it is relevant to understand the context of this currency. The British Pound (GBP), issued by the Bank of England since 886 A.D., ranks as the fourth most traded currency in the forex market, accounting for 12% of all FX transactions. Its main trading pairs include GBP/USD — known as ‘Cable’ — which accounts for 11% of the volume, followed by GBP/JPY (‘Dragon’ @E5@, and EUR/GBP )2@E5@. To put it into perspective, 10,000 GBP to USD would be approximately 12,610 US dollars at the current exchange rate, although this parity is under pressure.

What Determines the Movement of the Pound?

The primary factor influencing the Pound’s valuation is the monetary policy of the Bank of England. The BoE pursues a central goal: maintaining “price stability” with an inflation target of 2%. Its main mechanism to achieve this is adjusting interest rates. When inflation accelerates excessively, the central bank opts to raise rates to make borrowing more expensive, which typically strengthens the currency by attracting foreign investment seeking higher yields.

Currently, the outlook is different. With British inflation at 3.8% in August — nearly double the set target — there is upward pressure on rates. However, markets anticipate a potential easing of monetary policy, which exerts downward pressure on Cable.

Data Calendar and BoE Decision

This week is relatively quiet regarding UK indicators, with the main event being the Bank of England’s interest rate decision scheduled for Thursday. Expectations point to the Monetary Policy Committee (MPC) voting six to three to keep rates unchanged. A key aspect to watch will be the number of votes in favor of a cut, as an increase could be interpreted as a sign of future monetary policy weakening.

Meanwhile, markets will be paying attention to US ADP Employment figures on Wednesday. Although these data historically show a weak correlation with official reports, the current volatility caused by the US government shutdown makes investors place greater importance on this release, in the absence of more solid estimates like the Non-Farm Payrolls (NFP) report.

Additional Risk Factors for the Pound

Beyond monetary policy, economic indicators such as GDP, manufacturing and services PMI, and employment data decisively influence the direction of the Pound. A strong economy attracts foreign capital and encourages rate hikes, strengthening the currency. Conversely, weak data generally puts downward pressure on the currency.

The Trade Balance also plays a significant role. This indicator measures the net difference between exports and imports. A positive trade balance bolsters the currency due to increased demand from foreign buyers, while a negative balance exerts downward pressure.

In conclusion, the current weakness of GBP/USD responds to a combination of expectations of future rate cuts and implicit economic slowdown, partially counteracting the support that could stem from still-elevated inflation.