- GBP/USD struggles to register any meaningful recovery and seems vulnerable to slide further.
- Stagflation fears and UK fiscal concerns continue to weigh on the GBP amid a bullish USD.
- The upbeat US jobs data reinforced hawkish Fed bets and pushed the USD to a two-year top.
The GBP/USD pair enters a bearish consolidation phase at the start of a new week and languishes near its lowest level since November 2023 touched on Friday, around the 1.2200 mark during the Asian session. Moreover, the fundamental backdrop seems tilted in favor of bearish traders and suggests that the path of least resistance for spot prices remains to the downside.
The British Pound (GBP) continues with its relative underperformance in the wake of concerns over stagflation in the UK amid stubborn inflation and stalling growth. Furthermore, the recent rise in the UK government bond yields has raised anxiety about the UK’s fiscal health, which is seen as another factor undermining the GBP and validates the negative outlook for the GBP/USD pair amid a bullish US Dollar (USD).
In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, shot to over a two-year top on Friday in reaction to the upbeat US jobs data. The Nonfarm Payrolls (NFP) report showed that the US economy added 256K jobs in December, surpassing even the most optimistic estimates, while the Unemployment Rate unexpectedly dipped to 4.1%, reinforcing hawkish Federal Reserve (Fed) expectations.
Investors now seem convinced that the Fed will pause its rate-cutting cycle at its policy meeting later this month and are also pricing in the possibility of an interest rate hike later this year. The outlook remains supportive of elevated US Treasury bond yields, which, along with the risk-off impulse, supports prospects for a further appreciating move for the safe-haven buck and additional losses for the GBP/USD pair.
That said, a slightly oversold Relative Strength Index (RSI) on the daily chart makes it prudent to wait for some consolidation or a modest bounce before positioning for the next leg of a downfall. Nevertheless, the GBP/USD pair seems vulnerable to weaken further towards testing sub-1.2100 levels, or the November 2023 swing low, in the absence of any relevant economic data from the UK or the US.
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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