Pound Sterling declines at start of UK data-packed week as new tariff threats sour sentiment
- The Pound Sterling extends its downside against its peers amid growing UK economic risks.
- US President Trump imposes 30% tariffs on imports from the Eurozone and Mexico, keeping markets risk-averse.
- This week, investors will closely monitor CPI data for June from both the UK and the US.
The Pound Sterling (GBP) starts the week on a negative note, extending the losses seen on Friday and trading at its lowest level since June 23 against the US Dollar (USD). The British currency was hit badly at the end of last week after data showed United Kingdom (UK) Gross Domestic Product (GDP) shrank for a second consecutive month in May, contributing to concerns over ballooning fiscal risks.
The Office for National Statistics (ONS) reported that the economy contracted by 0.1% in May. However, the pace of decline was more moderate than the 0.3% contraction seen in April. Declining factory output contributed significantly to shrinking economic growth.
UK fiscal risks have escalated lately as Chancellor of the Exchequer Rachel Reeves has increased the welfare spending bill, which is expected to increase the financial burden for the administration by £4.8 billion by fiscal year 2029-2030.
Meanwhile, investors brace for significant volatility by the Pound Sterling this week as the UK Consumer Price Index (CPI) data for June and the labor market data for the three-months ending May are scheduled to be released on Wednesday and Thursday, respectively.
Investors will closely monitor the UK labor market data as the latest survey from the Recruitment and Employment Confederation trade body and accountants KPMG has signaled that the availability of individuals for jobs has increased significantly. Agencies reported that the index of staff availability rose to 66.1 from 63.3 in May, the highest reading since November 2020, Reuters reports.
Cooling labor market conditions often lead to an increase in market expectations for interest rate cuts by the Bank of England (BoE), a scenario that is unfavorable for the Pound Sterling. For now, traders are increasingly confident that the BoE will reduce interest rates by 25 basis points (bps) to 4% in the August monetary policy meeting.
Daily digest market movers: Pound Sterling weakens against US Dollar
- The Pound Sterling slides to near 1.3450 against the US Dollar (USD) during the European trading session on Monday, the lowest level in three weeks. The GBP/USD pair declines as demand for risk-perceived assets has diminished, following a jittery market mood amid trade tensions between the United States (US) and the European Union (EU).
- Over the weekend, US President Donald Trump announced 30% tariffs on imports on the EU and Mexico as they failed to close a trade agreement during the 90-day reciprocal tariff pause period. Trump also warned that he will raise tariffs if they retaliate or announce countermeasures.
- Fresh tariff threats have rekindled global trade worries, leading to an increase in demand for safe-haven assets. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near 98.00.
- This week, the US CPI data for June to be released on Tuesday will be the key trigger for the US Dollar. The CPI report is expected to show that prices rose at a faster pace. Such a scenario will discourage Federal Reserve (Fed) officials from lowering interest rates. Still, US President Trump has been criticizing the Fed, specifically its Chair Jerome Powell, for maintaining a restrictive monetary policy stance.
- According to the CME FedWatch tool, there is a 62.8% chance that the Fed will reduce interest rates in September. The Fed is almost certain to leave borrowing rates steady in the current range of 4.25%-4.50% in the policy meeting at the end of this month.
Technical Analysis: Pound Sterling slides below 20 and 50-day EMAs
The Pound Sterling extends its losing streak on Monday against the US Dollar. The near-term trend of the GBP/USD pair turns bearish as it slides below 20 and 50-day Exponential Moving Averages (EMAs), which trade around 1.3573 and 1.3480, respectively.
The 14-day Relative Strength Index (RSI) falls to near 40.00. A fresh bearish momentum would emerge if the RSI breaks below this level.
Looking down, the June 23 low of 1.3370 will act as a key support zone. On the upside, the three-and-a-half-year high around 1.3800 will act as a key barrier.
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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