Pound Sterling steadies as BoE decision, key UK data loom
- The Pound Sterling trades with caution at the start of the week ahead of key UK data and the BoE’s monetary policy decision.
- Investors expect the BoE to cut interest rates by 25 bps to 3.75% on Thursday.
- Before the BoE decision, UK unemployment and inflation data will be published.
The Pound Sterling (GBP) starts the Bank of England’s (BoE) monetary policy week on a cautious note against its major peers. However, the British currency braces for volatility and might face selling pressure this week amid a flurry of economic data releases and strong expectations that the Bank of England (BoE) is expected to cut interest rates by 25 basis points (bps) to 3.75%.
Analysts at Deutsche Bank expect the BoE to reduce interest rates by 25 bps, with a 5-4 vote split amid signs of easing inflationary pressures and a softer labor market. In October, the United Kingdom’s (UK) core Consumer Price Index (CPI) – which excludes volatile components of food, energy, alcohol and tobacco – grew by 3.4% year-on-year, the lowest figure seen since March.
Ahead of the BoE’s policy announcement, the UK CPI data for November will be published on Wednesday, which is expected to show that core inflation rremained at 3.4%.
On Tuesday, the UK labour market data for the three months ending October and the preliminary S&P Global Purchasing Managers’ Index (PMI) data for December are scheduled to be released. The employment data is expected to show that the jobless rate accelerated further and wage growth cooled.
Daily digest market movers: Pound Sterling flattens against US Dollar ahead of US NFP data
- The Pound Sterling trades flat around 1.3370 against the US Dollar (USD) during the European trading session on Monday. The GBP/USD pair consolidates as investors await the United States (US) Nonfarm Payrolls (NFP) data for October and for November, which is scheduled to be published on Tuesday.
- Investors will closely monitor the US employment data as it will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook. The Fed has reduced its interest rates by 75 basis points (bps) in the last three monetary policy meetings, and comments from officials have signaled that the major driver behind rate cuts was weak labor market conditions.
- On Friday, San Francisco Fed Bank President Mary Daly said in a Linkedin post that she favored interest rate cuts, adding that “inflation is too high and the job market is getting softer, but we cannot let the labor market falter", Reuters reported.
- On Tuesday, investors will also focus on US Retail Sales for October and flash S&P Global PMI data for December.
- Broadly, the Cable is upbeat as the US Dollar (USD) remains close to its eight-week low amid growing expectations that the Federal Reserve (Fed) will deliver more interest rate cuts in 2026 than officials signaled in the dot plot last week.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades with caution near its eight-week low of 98.13.
- According to the CME FedWatch tool, there is a 64.3% chance that the Fed will cut interest rates at least two times by the end of 2026. This market bets defy the last Fed’s dot plot, which showed that policymakers see the Federal Fund Rate falling to 3.4% by 2026, indicating just one more interest rate cut from current levels of 3.50%-3.75%.
Technical Analysis: GBP/USD aims to break above 50% Fibo retracement at 1.3400
GBP/USD trades steadily around 1.3366 as of writing. The 20-day Exponential Moving Average (EMA) at 1.3286 rises, and the pair holds above it, keeping the near-term bias pointed higher.
The 14-day Relative Strength Index (RSI) at 61 reflects positive momentum without overbought conditions.
Measured from the 1.3783 high to the 1.3008 low, the 38.2% retracement at 1.3304 has been cleared, underpinning the recovery tone. The 50% retracement at 1.3395 marks immediate resistance, and a break higher would extend the rebound towards 61.8% Fibo retracement at 1.3488. Failure to top that barrier could see consolidation back toward the moving average.
The trend remains supported while price sustains above the ascending 20-day EMA, though a drop beneath 1.3286 would open the door for further downside towards the December low of 1.3180.
(The technical analysis of this story was written with the help of an AI tool)
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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