Will the British pound carry trade cause a surge in GBP prices?
The pound hits its highest level since 2022 as GBP/USD climbs to 1.3340. Explore how Bank of England's steady interest rates, US Federal Reserve cuts, and the carry trade could influence future GBP prices.
Key points
- GBP/USD surges to 1.3340, its highest level since March 2022
- Bank of England maintains interest rate at 5% following a 25-bps cut in August
- US Federal Reserve expected to cut rates to 3.0% by 2026
- Carry trade could drive demand for GBP as BoE maintains higher rates
GBP/USD above 1.3300 highest prices since 2022
It was a robust morning for the pound, as GBP/USD surged to a high of 1.3340, marking its strongest level since March 2022. This climb reflects growing investor confidence in the British economy amidst recent monetary policy decisions and economic data releases. The pound's strength against the dollar can be attributed to a combination of factors, including the Bank of England's recent interest rate policies and positive economic indicators. Traders and investors are closely watching the currency pair, as this rally suggests renewed optimism about the UK's economic outlook.
GBP/USD price history
Highest interest rates of major economies: Bank of England
During its September 2024 meeting, the Bank of England decided to maintain the Bank Rate at a steady 5%. This decision follows a notable 25-bps cut implemented in August 2024, marking the first rate reduction in more than four years. The August cut was a significant move aimed at stimulating the economy amid signs of slowing growth and inflation pressures. By keeping the rate unchanged in September, the Bank of England signaled a cautious approach, allowing time to assess the impact of the previous cut on the economy.
US Federal Reserve expected to cut to 3.0%
After the staggering 50-bps rate cut by the US Federal Reserve this week, further forecasts of the Fed Funds Interest Rate predict a rate as low as 3.0% in 2026. Currently, the rate has been cut to 5.0%, with predictions of further cuts to 3.50% in 2025 before 2026.
GBP carry trade could cause demand for pound
Forex price demand is largely driven by the carry trade, or the difference in interest rates between two regions; if rates stay at 5.0% from the Bank of England and are cut elsewhere, GBP could rally against major currencies like USD, EUR, and JPY. This is because the higher interest rate offered by the Bank of England would provide better return on investments denominated in pounds.
Where is GBP/USD going next?
Back in 2016, the Brexit referendum shocked the forex markets, resulting in the pound reaching lows of 1.20, and tanking even lower in the coming years. For the next few years, additional political uncertainty affected the UK economy after this referendum—confirmation of interest rate hikes post-Brexit, for example, resulted in a much weaker pound and higher inflation. Looking ahead, the future of GBP/USD appears multifaceted. The recent strength of the pound against the dollar, bolstered by the Bank of England's steady interest rate and positive economic indicators, could continue if investor confidence remains high. However, the anticipated rate cuts by the US Federal Reserve to potentially 3.0% by 2026 could shift the dynamics. Forex traders should closely monitor the interest rate differentials, as the carry trade could drive demand for the pound, especially if the Bank of England maintains higher rates relative to other central banks. Historical events like the Brexit referendum highlight the currency pair's susceptibility to political and economic uncertainties. Thus, the future trajectory of GBP/USD will likely hinge on a combination of monetary policies, economic data, and geopolitical developments.
How to trade GBP/USD
- Open an account to get started, or practice on a demo account
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- Open, monitor, and close positions on GBP/USD
Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
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