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.