Pound Sterling holds onto gains against USD as investors gauge Trump’s tariff plans
- The Pound Sterling grips gains above 1.2300 against the US Dollar in the absence of explicit Trump tariff plans.
- Trump threatens to impose 10% tariffs on China on February 1, lower than the 60% vowed in the election campaign.
- Investors expect the BoE to reduce interest rates by 25 bps in February.
The Pound Sterling (GBP) ticks lower against the US Dollar (USD) in Wednesday’s London session but still holds onto Tuesday’s gains above the key support level of 1.2300. The GBP/USD pair edges lower as the US Dollar recovers slightly, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edging higher from its two-week low of 107.90.
However, the Greenback could face selling pressure as its safe-haven demand has moderated. The USD’s safe-haven appeal has diminished as the tariff plans disclosed by the United States (US) administration under President Donald Trump are less fearful than what investors had anticipated in the election campaign. Trump said on Tuesday that he would impose 10% tariffs on China on February 1, the same day he vowed to slap 25% tariffs on other North American economies. In the election campaign, Trump threatened to impose 60% tariffs on China.
Market experts believe that tariffs would come in a more balanced way, due to which the risk premium of the US Dollar has diminished. A cautious tariff approach would also trim upside risks to inflation remaining persistent, weighing on firm expectations that the Federal Reserve (Fed) will keep interest rates at their current levels for longer.
According to the CME FedWatch tool, traders are confident that the Fed will keep its key borrowing rates in the range of 4.25%-4.50% in the upcoming three policy meetings.
Daily digest market movers: Pound Sterling outperforms its peers
- The Pound Sterling performs strongly against its major peers on Wednesday as market sentiment turns favorable for risk-perceived currencies amid ambiguity over Trump’s tariff plans. However, its outlook is still uncertain as the Bank of England (BoE) is almost certain to cut interest rates by 25 basis points (bps) to 4.5% in the policy meeting in February.
- Soft United Kingdom (UK) inflation and Retail Sales data for December, weak labor demand in three months ending November, and moderate Gross Domestic Product (GDP) growth have forced traders to price in a 25 bps interest rate reduction by the BoE next month.
- However, high wage growth is still a major concern for the BoE, given that wage pressures are the key driving force for inflation in the service sector. The Office for National Statistics (ONS) reported on Tuesday that Average Earnings Excluding Bonuses rose at a robust pace of 5.6%, faster than estimates of 5.5% and the former 5.2%.
- Going forward, investors will focus on the preliminary S&P Global/CIPS Purchasing Managers Index (PMI) data for January, which will be published on Friday.
Technical Analysis: Pound Sterling strives to climb above 20-day EMA
The Pound Sterling strives to break above the 20-day Exponential Moving Average (EMA), which trades around 1.2360, against the US Dollar. The GBP/USD pair rebounded after posting a fresh over-one-year low of 1.2100 on January 13.
The 14-day Relative Strength Index (RSI) rebounds to near 43.50 from the 20.00-40.00 range, suggesting that the bearish momentum has ended, at least for now.
Looking down, the pair is expected to find support near the October 2023 low of 1.2050. On the upside, the round level of 1.2400 will act as key resistance.
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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