- Sterling outperforms major peers as weak UK data weighs on gilt yields.
- Market experts project an interest rate cut of 100 basis points by the BoE this year.
- The risk profile turns favorable for risk assets ahead of Trump’s inauguration.
The British Pound (GBP) recovers against its major peers at the start of the week. The gains in the British currency are partly due to a further advance in demand for United Kingdom (UK) gilts due to weak UK retail sales data for December and increasing demand for risk assets ahead of the inauguration of the president-elect of the United States (US), Donald Trump.
Strong buying interest in UK gilts has weighed heavily on government borrowing costs, pushing 30-year yields even lower, close to 5.20% from their more than 26-year high of 5.47% recorded on December 13. January. An unexpected drop in UK retail sales data has further accelerated the Bank of England’s (BoE) dovish expectations. Monthly retail sales contracted 0.3%, while expected to grow at a faster pace of 0.4% from a 0.1% increase in November. Analysts at Oxford Economics expect the BoE to cut interest rates by 100 basis points (bps) to 3.75% by the end of the year.
UK gilt yields peaked last week following the release of weaker-than-expected Consumer Price Index (CPI) data for December, increasing speculation that the BoE will cut its interest rates. debt at the next policy meeting on February 6.
It is worth noting that the size of the drop in UK gilt yields is larger than the British pound’s recovery, as weak UK data has boosted the BoE’s dovish expectations, which are technically negative for the GBP. Increased bets on lower interest rates from the BoE are unfavorable for the British pound. Meanwhile, UK equity markets have risen sharply in recent trading days as Chancellor of the Exchequer Rachel Reeves will not be forced to raise taxes or cut public spending to meet her economic agenda. .
Looking ahead, the Pound’s next move will be guided by UK employment data for the three months ending in November, due to be released on Tuesday.
Daily Market Summary: Pound Sterling Rises Against US Dollar Ahead of Trump Inauguration
- The British Pound bounces near 1.2200 against the US Dollar (USD) in the European session on Monday. The GBP/USD pair rises as the US Dollar’s safe-haven appeal diminishes ahead of Trump’s inauguration ceremony for the presidential office. The US Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, falls near 109.00.
- The overall outlook for the US Dollar remains firm as investors expect economic policies under the Trump administration to be pro-growth and inflationary for the US economy. According to a report by Fox Digital News, Trump signs more than 200 orders on his first day back at the White House. His orders could include immigration controls, higher tariffs and lower taxes.
- The US economic calendar has little to offer this week, except for preliminary S&P Global Purchasing Managers’ Index (PMI) data for January, due out on Friday. Until then, the dollar will be influenced by market expectations about the outlook for the Federal Reserve’s (Fed) monetary policy for the full year.
- According to the CME’s FedWatch tool, traders are pricing in more than a 25 bps interest rate cut this year, seeing the first at the June meeting.
Technical Analysis: Sterling remains around 1.2200
The British Pound is trading higher around 1.2200 against the US Dollar on Monday, but has been largely sideways between 1.2100 and 1.2300 for a week. The outlook for the GBP/USD pair remains bearish as the 50-day EMA slopes down around 1.2538.
The 14-day Relative Strength Index (RSI) remains within the range of 20.00-40.00, suggesting strong bearish momentum.
Looking down, the pair is expected to find support near the October 2023 low of 1.2050. To the upside, the January 15 high of 1.2306 will act as key resistance.
British Pound FAQs
The British Pound (GBP) is the oldest currency in the world (AD 886) and the official currency of the United Kingdom. It is the fourth most traded foreign exchange (FX) unit 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, which represents 11% of FX, GBP/JPY (3%) and EUR/GBP (2%). The British Pound is issued by the Bank of England (BoE).
The most important factor influencing the value of the Pound Sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its main objective of “price stability” – a constant inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates. When inflation is too high, the Bank of England will try to control it by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for sterling, as higher interest rates make the UK a more attractive place for global investors to invest their money. When inflation falls too much it is a sign that economic growth is slowing. In this scenario, the Bank of England will consider lowering interest rates to make credit cheaper, so that companies will take on more debt to invest in projects that generate growth.
The data released measures the health of the economy and can affect the value of the pound. Indicators such as GDP, manufacturing and services PMIs and employment can influence the direction of the Pound.
Another important piece of information that is published and affects the British Pound is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period. If a country produces highly in-demand export products, its currency will benefit exclusively from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa in the case of a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
