Pound Sterling trades with caution as UK stagflation risks deepen
- The Pound Sterling wobbles against its major peers amid deepening risks of stagflation in the UK economy.
- UK gilt yields tumble on firm BoE dovish bets.
- The risk-premium in the US Dollar has diminished as investors digest Trump’s tariff fears.
The Pound Sterling (GBP) trades cautiously against its major peers at the start of the week as investors worried about the growing risks of stagflation in the United Kingdom (UK) economy. Friday’s S&P Global UK Purchasing Managers Index (PMI) report for January showed that employment levels dropped for the fourth straight month and cost pressures accelerated in the private sector, a scenario that leads to higher inflation as producers pass on the impact of higher input costs to customers.
A slowdown in labor demand appears to be the outcome of Chancellor of the Exchequer Rachel Reeves’ announcement of increasing employers’ contribution to National Insurance (NI).
The first indicators of business conditions in 2025 add to the gloom about the UK economy, with companies cutting employment amid falling sales and concerns about business prospects. Inflation pressures have, meanwhile, reignited, pointing to a stagflationary environment, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said.
Deteriorating job market conditions and rising price pressures are expected to add more troubles for the Bank of England (BoE), which is scheduled to announce its first monetary policy decision of 2025 on February 6. Traders are confident that the BoE will reduce interest rates by 25 basis points (bps) to 4.5%.
Meanwhile, firm BoE dovish bets have also weighed on yields on UK 30-year gilts, down over 1% to near 5.15% on Monday.
Daily digest market movers: Pound Sterling recovers losses against US Dollar
- The Pound Sterling recovers most intraday losses and rebounds above 1.2450 against the US Dollar (USD) in Monday’s European session. The GBP/USD pair bounces back as the US Dollar retreats after investors digest fears of United States (US) President Donald Trump imposing 25% tariffs on Columbia overnight.
- Over the weekend, President Trump threatened to impose tariffs on its South American trading partner for not allowing military flights carrying illegal immigrants in their territory. Later, Trump put proposed tariffs on hold after Columbia accepted his terms.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls back to near 107.50 from an intraday high of 107.80. The Greenback lost its risk premium as market participants expected President Trump would use tariffs only to negotiate deals.
- “This seems to feed into the growing sense that Trump is underdelivering on protectionism compared to pre-inauguration remarks, and that ultimately some of those tariff threats may not materialize as long as some concessions are made on trade,” said ING.
- Going forward, this week’s primary trigger for the US Dollar will be the Federal Reserve’s (Fed) monetary policy decision, which will be announced on Wednesday. The Fed is almost certain to keep interest rates unchanged in the range of 4.25%-4.50%. Investors will pay close attention to Fed Chair Jerome Powell’s press conference after the interest rate decision, who is expected to face the question of whether the Fed will positively react to Trump’s call for immediate rate cuts.
Technical Analysis: Pound Sterling corrects from 1.2500
The Pound Sterling faces selling pressure after revisiting the psychological resistance of 1.2500 against the US Dollar. However, the near-term outlook of the GBP/USD pair remains firm as it holds the 20-day Exponential Moving Average (EMA), which trades around 1.2380.
The 14-day Relative Strength Index (RSI) moves higher above 50.00 from the 20.00-40.00 range, suggesting that the bearish momentum has ended, at least for now.
Looking down, the January 13 low of 1.2100 and the October 2023 low of 1.2050 will act as key support zones for the pair. On the upside, the December 30 high of 1.2607 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.
추천 기사
