GBP/USD climbs back above mid-1.2600s, closer to over two-month peak touched on Friday

GBP/USD regains positive traction on Monday amid the emergence of fresh USD selling.
The USD drops to over a two-month trough amid concerns over US consumer health.
The GBP bulls shrug off the BoJ’s gloomy outlook and remain at the mercy of the USD.

Haresh Menghani FXStreet

The GBP/USD pair kicks off the new week on a positive note and climbs above mid-1.2600s during the Asian session, closer to over a two-month top touched on Friday. Spot prices now look to build on the momentum beyond the 100-day Simple Moving Average (SMA) amid a weaker sentiment surrounding the US Dollar (USD).

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, drops to its lowest level since December 10 amid doubts about US consumer health, fueled by a disappointing sales forecast from Walmart. Moreover, worries over the impact of US President Donald Trump's tariffs on price growth and consumer spending, along with a pickup in US stock futures, turn out to be key factors undermining the safe-haven buck.

The British Pound (GBP), on the other hand, continues to draw support from Friday's upbeat UK Retail Sales, which climbed 1.7% MoM in January compared to the previous month's upwardly revised print of -0.6%. Adding to this, the UK Services PMI unexpectedly rose to 51.1 in February from 50.9 in the previous month. This, to a larger extent, overshadowed a fall in the UK Manufacturing PMI to a 14-month low level of 46.4 in February.

The GBP/USD pair, meanwhile, seems rather unaffected by the Bank of England's (BoE) gloomy outlook and remains at the mercy of the USD price dynamics. In the absence of any relevant market-moving economic releases, the fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside. This, in turn, supports prospects for an extension of the recent well-established uptrend witnessed over the past month or so.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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