Pound Sterling edges higher as BoE seems to follow moderate policy-easing cycle
- The Pound Sterling gains marginally against its peers on a broader note as investors expect the BoE to follow a slower policy-easing cycle this year.
- US President Trump proposes an additional 10% tariffs on China.
- Investors await the US PCE inflation data that will influence the Fed’s policy outlook.
The Pound Sterling (GBP) ticks higher broadly against its major peers on Friday as investors expect the Bank of England’s (BoE) monetary easing cycle to be more moderate this year than other central bankers from major economies. Traders have fully priced in two interest rate cuts by the BoE. On the contrary, the European Central Bank (ECB) is expected to cut interest rates thrice and the Federal Reserve (Fed) is anticipated to reduce them by 60 basis points (bps).
Market participants have been expecting a slower BoE policy easing cycle due to strong wage growth. Average Earnings Excluding bonuses in three months ending December accelerated to 5.9%, the highest level seen since April 2024.
BoE Deputy Governor Dave Ramsden also said in his speech at Stellenbosch University in South Africa during early European trading hours on Friday that wage growth is “stronger than he expected”. However, Ramsden remained confident that the “core disinflationary process remains intact”. On the global front, he said it is difficult to ascertain whether the impact of United States (US) President Donald Trump’s tariffs will be “inflationary or deflationary” for the economy.
Meanwhile, the meeting between United Kingdom (UK) Prime Minister Keir Starmer and the US President on Thursday concluded without a deal. However, Trump said there was "a very good chance" of a trade deal "where tariffs wouldn't be necessary." Trump added that such a deal could be made "pretty quickly," BBC reported.
Daily digest market movers: Pound Sterling underperforms US Dollar
- The Pound Sterling slightly extends its downside move to near 1.2570 against the US Dollar (USD) in Friday’s European session. The GBP/USD pair faces pressure as the US Dollar gains further amid a risk-off market mood. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, moves higher to 107.45.
- Market participants are cautious as President Donald Trump has announced more levies on China and provided more clarification on the timeline for 25% import duties on Canada and Mexico and reciprocal tariffs.
- In his tweet at Truth Social on Thursday, Trump said that 25% tariffs on Canada and Mexico will come into effect on March 4. His tweet confirmed that he is not providing an additional month-long extension to his North American allies as “drugs are still pouring” into the economy. Trump announced an additional 10% levy on China, arguing that drugs entering the US are in the form of fentanyl, which is made in and supplied by China. He added that reciprocal tariffs could come into full force and effect on April 2.
- Investors see Trump’s fresh tariff threats as a critical escalation in the global trade war that could lead to an economic slowdown across the globe.
- On the domestic front, investors await the US Personal Consumption Expenditure Price Index (PCE) data for January, which will be published at 13:30 GMT. Economists expect the US core PCE inflation – which excludes volatile food and energy prices – to have decelerated to 2.6% year-over-year from 2.8% in December. Month-on-month inflation data is estimated to have grown by 0.3%, faster than the former reading of 0.2%.
- Investors will pay close attention to the US core PCE inflation data as it is the Federal Reserve’s (Fed) preferred inflation gauge. These figures will influence market expectations for the central bank’s monetary policy outlook.
Technical Analysis: Pound Sterling struggles around 38.2% Fibo retracement at 1.2620
The Pound Sterling struggles to hold above the 38.2% Fibonacci retracement from the end-September high to the mid-January low downtrend against the US Dollar around 1.2610 on Friday. The 20-day Exponential Moving Average (EMA) near 1.2560 continues to provide support to the pair.
The 14-day Relative Strength Index (RSI) falls back down within the 40.00-60.00 range, suggesting that the bullish momentum has concluded for now. However, the positive bias remains intact.
Looking down, the February 11 low of 1.2333 will act as a key support zone for the pair. On the upside, the 50% Fibonacci retracement at 1.2765 will act as a key resistance zone.
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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