Pound Sterling trades cautiously as investors shift focus to UK employment and inflation data
- The Pound Sterling remains uncertain against its major peers on Friday as investors worry about the UK's economic performance.
- Investors await the UK labor market and inflation data for fresh cues on BoE’s policy outlook next week.
- The US Dollar weakens as US President Trump did not impose reciprocal tariffs immediately.
The Pound Sterling (GBP) trades with caution against its major peers on Friday. The British currency struggles for a firm footing as investors are concerned over the United Kingdom's (UK) economic outlook despite upbeat Gross Domestic Product (GDP) data for December and the last quarter of the previous year.
In the latest monetary policy meeting, the Bank of England (BoE) halved its GDP forecasts for the year to 0.75%, which was a big blow for Chancellor of the Exchequer Rachel Reeves, who has been promising to lift economic growth. The BoE stated that higher global tariffs would slow down their growth rate.
The UK Office for National Statistics (ONS) reported on Thursday that the economy surprisingly expanded by 0.1% in the fourth quarter of 2024, while economists projected it to have contracted at a similar pace. In December, the GDP growth rate was robust at 0.4%.
Going forward, the next triggers for the Pound Sterling will be the labor market data for the three months ending December and the Consumer Price Index (CPI) data for January, which will be released on Tuesday and Wednesday, respectively. Both economic indicators will influence market speculation about whether the Bank of England (BoE) will reduce interest rates again in the March meeting. The BoE cut its key borrowing rates by 25 basis points (bps) to 4.5% on February 6.
Daily digest market movers: Pound Sterling holds onto Thursday’s gains against US Dollar
- The Pound Sterling trades near Thursday’s high around 1.2560 against the US Dollar (USD) in Friday’s European session. The GBP/USD pair exhibits strength as the US Dollar weakens after United States (US) President Donald Trump directed the Commerce Department and trade representatives to devise a plan to match tariffs on each product with every country.
- President Trump said in the Oval Office on Thursday, "I've decided for purposes of fairness that I will charge a reciprocal tariff." Trump added, "It's fair to all, no other country can complain." The President further added that tariffs will “level the playing field for all US companies.”
- This scenario weighed heavily on the US Dollar, as market participants anticipated that Trump would impose reciprocal tariffs immediately. These assumptions were based on his tweet at Truth Social, “Three great weeks, perhaps the best ever, but today is the big one: reciprocal tariffs!!! Make America great again!!!", which came in early North American trading hours on Thursday.
- In Friday’s European session, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, appears fragile near an over two-week low at around 107.00.
- Market participants expect higher tariffs to accelerate local manufacturing activities in the US. This scenario would boost labor demand and push price pressures higher, forcing Federal Reserve (Fed) officials to maintain a restrictive monetary policy stance for longer.
- According to the CME FedWatch tool, the Fed is expected to keep interest rates steady in the next three policy meetings. There is an almost 50% chance that the Fed can cut interest rates in the July meeting.
- In Friday’s session, investors will focus on the US Retail Sales data for January, which will be published at 13:30 GMT. The US Census Bureau is expected to report that Retail Sales, a key measure of consumer spending, declined by 0.1% after expanding 0.4% in December.
Technical Analysis: Pound Sterling gains ground above 1.2500
The Pound Sterling revisits a six-week high at around 1.2570 against the US Dollar. The GBP/USD pair strengthened after breaking above the 50-day Exponential Moving Average (EMA), which stands around 1.2490, on Thursday.
The 14-day Relative Strength Index (RSI) advances to near 60.00. A bullish momentum would activate if the RSI (14) sustains above that level.
Looking down, the February 3 low of 1.2250 will act as a key support zone for the pair. On the upside, the 38.2% and 50% Fibonacci retracements at 1.2610 and 1.2767, respectively, will act as key resistance zones.
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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