GBP/USD tests key averages as UK data softens and FOMC strikes hawkish tone
- The Pound Sterling remains under pressure from weak UK labor market and easing inflation, while hawkish Fed minutes lift the US Dollar.
- UK headline Consumer Price Index (CPI) dropped to 3% in January while unemployment rose to 5.2%, reinforcing expectations for a Bank of England rate cut from the current 3.75% as early as March.
- Hawkish FOMC minutes pushed back on near-term Fed easing; UK January retail sales and preliminary Purchasing Managers Index (PMI) data on Friday will test the Pound Sterling's resilience.
The Bank of England (BoE) held rates at 3.75% at its February meeting in a tight 5-4 vote, with four members pushing for a 25 basis point cut. This week's data has strengthened the case for easing: Tuesday's labor report showed unemployment climbing to 5.2% with payrolls falling by 30K, and Wednesday's CPI confirmed headline inflation dropped to 3% from higher levels while the Retail Price Index fell to 3.8%. The softening data keeps a March rate cut firmly in play.
On the US Dollar side, the FOMC minutes released Wednesday struck a hawkish tone, with members describing economic growth as "solid" and warning that progress toward the 2% inflation target may be "slower and more uneven" than expected. Some participants flagged that rate hikes could not be ruled out if inflation reaccelerates, a notable shift that pushed the US Dollar higher. Friday's UK retail sales and preliminary PMI data, alongside US GDP and core PCE, will set the tone heading into the March BoE decision.
Pullback toward 200-day EMA as Stochastic approaches oversold
On the daily chart, GBP/USD drifted lower on Thursday, settling touching a nearly three-week low of 1.3434 as the sell-off from the late January high at 1.3869 continues. The pair has now broken below the 50-day EMA at 1.3520 and is toying with the 200-day EMA at 1.3420, which represents the next major support. The uptrend from the early January lows near 1.3344 is still valid but under pressure, as the pair has retraced roughly half of the January-to-February rally. The Stochastic Oscillator has crossed bearish and is now approaching the oversold zone, suggesting near-term selling momentum is strong but a bounce could develop near the 200-day EMA. Recent sessions show a series of bearish candles with increasing body size, pointing to growing selling conviction. Immediate support sits at the 200-day EMA near 1.3415, with 1.3344 (year-to-date low) below. Resistance rests at 1.3526 (50-day EMA), followed by 1.3600.
GBP/USD daily chart
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.
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