GBP/USD holds gains amid soft US Dollar on tariff fallout

US tariffs on Mexico, Canada and China weigh on risk sentiment, dragging the USD lower.
The US Dollar Index (DXY) hits a three-month low at 105.87 before recovering slightly.
UK inflation risks rise as minimum wage hike adds pressure ahead of BoE rate cuts.

Christian Borjon Valencia FXStreet

The Pound Sterling (GBP) clings to early gains, extending its advance to two days versus the US Dollar (USD) as tariffs enacted by United States (US) President Donald Trump against Mexico, Canada, and China come into effect. Although the market is risk-averse, traders punish the Greenback as the economic outlook darkens. The GBP/USD pair is trading at 1.2708, up 0.08%

Sterling rises to 1.2708 as Greenback struggles on economic concerns

The economic calendar in the US is light, except for speeches by Federal Reserve (Fed) officials. Tariffs of 25% on imports from Mexico and Canada and an additional 10% on Chinese products shifted investors' moods. Despite these measures being seen as inflation-prone, US Treasury bond yields are edging lower, with the 10-year T-note down seven basis points in the week at 4.132%.

Consequently, the US Dollar Index (DXY), which tracks the buck's behavior against a basket of six currencies, has fallen to a three-month low of 105.87. However, it has pared some of its losses, the DXY is still down 0.33% at 106.20.

Across the pond, the British Retail Consortium (BRC) shop price index in February dropped by 0.7 % YoY overnight. Nevertheless, prices rose 0.4% MoM due to a rise in food prices. BRC Chief Executive Helen Dickinson said that shop prices will likely increase further as retailers face a surge in annual costs this year due to a nearly 7% rise in the minimum wage on April 1.

This measure could put upward pressure on inflation at a time when the Bank of England (BoE) is embarking on an easing cycle. In January, the Consumer Price Index (CPI) rose by 3%, hitting a 10-month high. Ahead in the docket, BoE Governor Andrew Bailey would cross the wires on Wednesday.

In the US, market participants will be watching President Donald Trump address the US Congress at 01:00 GMT.

GBP/USD Price Forecast: Technical outlook

Despite reaching a new year-to-date (YTD) high of 1.2753, the GBP/USD pair retreated somewhat as market players digested US tariffs. Buyers lacked the strength to test the 200-day Simple Moving Average (SMA) at 1.2785, which could’ve sent the pair towards 1.2800 if cleared. On the other hand, if GBP/USD slumps beneath 1.2700, sellers would be poised to push prices toward the 100-day SMA at 1.2627, ahead of 1.2600.

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

Christian Borjon Valencia

FXStreet

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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