GBP/USD drops to near 1.2600 ahead of UK labor market data
- GBP/USD declines ahead of UK labor data set to be released on Tuesday.
- UK PM Starmer said that any peace agreement for Ukraine would need a "US backstop" to deter further Russian attacks.
- Fed Governor Michelle Bowman warned that upside inflation risks persist, stressing the need for more clarity before considering rate cuts.
GBP/USD breaks its five-day winning streak, trading around 1.2600 during Tuesday's Asian session. Traders are awaiting UK employment data set to be released later in the day. The Claimant Count Change for January is expected to rise to 10K new unemployment benefit claimants, up from the previous 0.7K. The ILO Unemployment Rate is also forecast to increase to 4.5% from 4.4%.
British Prime Minister Keir Starmer stated on Monday that any peace deal for Ukraine would require a "US backstop" to prevent Russia from attacking again, according to Reuters. Starmer emphasized that Ukraine's future is a crucial issue for Europe, and it is urgent for Europe to share the responsibility in addressing the situation.
The downside risk for the GBP/USD pair could be linked to the strengthening US Dollar as Treasury yields rise. The US Dollar Index (DXY), which tracks the USD against six major currencies, edges higher after losing ground in the previous three sessions, trading around 106.90. At the same time, 2-year and 10-year US Treasury yields stand at 4.27% and 4.51%, respectively.
Federal Reserve Governor Michelle Bowman remarked on Monday that rising asset prices may have slowed the Fed's progress on inflation. While she expects inflation to decline, she warned that upside risks persist and stressed the need for more certainty before considering rate cuts.
Meanwhile, Fed Governor Christopher Waller acknowledged on Monday that while inflation has improved, progress has been “excruciatingly” slow. Waller emphasized the importance of not letting policy uncertainty hinder data-driven decisions.
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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