GBP/USD holds positive ground near 1.2450 on US Dollar bullish

GBP/USD rebounds to around 1.2440 in Monday’s early European session.
Fed officials highlighted a need to balance inflation control with maintaining a strong labor market.
The dovish BOE bets might cap the upside for the pair in the near term.

Lallalit Srijandorn FXStreet

The GBP/USD pair extends the recovery to near 1.2440 during the early European session on Monday. However, the potential upside seems limited amid the Federal Reserve's (Fed) hawkish stance. Later on Monday, investors await the Fed’s Governor Lisa Cook speech for more cues about the US interest rate outlook this year.

The US central bank has cut the interest rates by one percentage point since September 2024 and signaled slower rate cuts this year, which supports the US Dollar (USD) broadly. Over the weekend, the Fed officials reinforced the view that the Fed will take a more cautious approach to cutting interest rates this year. Fed policymakers warned the fight against inflation is still with them while also highlighting their need to protect job market stability.

Traders will closely monitor the US December labor market data on Friday. Economists expect 150,000 new jobs for December, while the unemployment rate is expected to remain at 4.2% during the same report period. The Average Hourly Earnings are projected to rise by 0.3% MoM in December. In case of a weaker-than-expected outcome, this could weigh on the USD against the Pound Sterling (GBP).

On the other hand, the rising Bank of England (BoE) dovish bets could undermine the GBP. The markets are now pricing in nearly 60 basis points (bps) interest rate cut by the BoE this year, up from 53 bps seen in the last week of December. Matthew Ryan, head of market strategy at Ebury, said the BOE policymakers appear more divided on the path ahead for UK interest rates and that reflects “the complex outlook for the UK economy, as fragile consumer demand is counterbalanced by the pro-inflationary implications of the Autumn Budget and Trump’s tariff proposals.”

(This story was corrected on January 6 at 08:13GMT to say that a weaker-than-expected outcome in the US labor market data on Friday could weigh on the USD against the Pound Sterling (GBP), not against the Cable.)

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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