Pound Sterling retraces against USD as investors gauge consequences of US-China trade war
- The Pound Sterling drops to near 1.2400 against the US Dollar as investors worry that a trade war between the US and China could intensify.
- China retaliates to US President Trump’s tariffs and announces levies on various imports from the US.
- This week, investors will keenly focus on the BoE’s policy decision and the US NFP data.
The Pound Sterling (GBP) declines to near 1.2400 against the US Dollar (USD) in Tuesday’s European session. The GBP/USD pair hits profit-booking after a strong upside in North American trading hours on Monday, following the United States (US) President Donald Trump’s decision to pause 25% tariff imposition on Canada and Mexico for 30 days.
President Trump agreed to a 30-day pause in return for concessions on border and crime enforcement with the two neighboring countries, Reuters reported. The announcement led to a sharp sell-off in the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, retreated to 108.34 after posting a fresh over two-week high of 109.88 on Monday, but has rebounded to near 108.90 at the press time.
The delay of tariff orders by the US on its North American peers has resulted in an interim relief for risk-perceived assets across the globe. However, Trump is still on with his decision of a 10% levy on China and has also threatened to go beyond. Such a scenario would limit the risk appetite of investors. In retaliation, China has also slapped tariffs on imports from the US. The Chinese finance ministry said that it would impose levies of 15% on coal and Liquefied Natural Gas (LNG) and 10% on crude oil, farm equipment, and some autos, according to a Reuters report.
Going forward, the next trigger for the US Dollar will be the US Nonfarm Payrolls (NFP) data for January, which will be released on Friday. The official employment data is expected to significantly influence market expectations for how long the Federal Reserve (Fed) will keep its waiting mode on interest rates. Fed Chair Jerome Powell stated last week that only “real progress in inflation or at least some weakness in labor market” could force us to make some adjustments in the monetary policy stance.
In Tuesday’s session, investors will focus on the JOLTS Job Openings data for December, which will be published at 15:00 GMT. Economists expect that employers posted 8 million fresh job offers, marginally lower than almost 8.10 million in November.
Daily digest market movers: Pound Sterling will be influenced by BoE’s policy decision
- The Pound Sterling exhibits a mixed performance against its major peers on Tuesday as investors await the Bank of England’s (BoE) monetary policy decision, which will be announced on Thursday.
- According to money market expectations, traders have priced in an 81 basis points (bps) interest rate reduction this year, suggesting there will be more than three 25 bps interest rate cuts by December. The first is seen coming this week, which will push borrowing rates lower to 4.50%.
- Meanwhile, yields on 30-year United Kingdom (UK) gilt have declined to near 5.04%, the lowest level seen in almost two weeks, in anticipation that US President Trump won’t pick a lethal trade fight with Britain. Over the weekend, Trump’s comments indicated that he is not sure about imposing tariffs on the UK and he was sure that a deal could be made as Prime Minister Keir Starmer has been "very nice".
- UK gilt yields had a strong run from November 29 to January 13 as investors were worried about the economic outlook on the back of potential tariff hikes from the US.
Technical Analysis: Pound Sterling corrects slightly from 1.2455
The Pound Sterling retraces from Monday’s high of 1.2455 to near 1.2400 on Tuesday. The GBP/USD pair returns above the 20-day Exponential Moving Average (EMA), which trades around 1.2400. However, the near-term outlook for Cable remains uncertain as the 50-day EMA continues to be a barrier for the Pound Sterling bulls, hovering around 1.2500.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sideways trend.
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.
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