GBP/USD remains below 1.3400 as US Dollar gains on Fed caution bets

GBP/USD may decline further as US Jobless Claims support expectations that the Fed will keep rates unchanged.
Initial Jobless Claims fell to 198K, beating expectations of 215K and down from the prior week’s 207K.
The Pound Sterling may find support as strong UK GDP data tempers dovish Bank of England expectations.

Akhtar Faruqui FXStreet

GBP/USD edges higher after registering modest losses in the previous session, trading around 1.3380 during the Asian hours on Friday. The pair may further lose ground as the US Dollar (USD) receives support after Thursday’s US Initial Jobless Claims data, which reinforced expectations that the Federal Reserve (Fed) will keep interest rates on hold for the coming months.

Data from the US Department of Labor (DOL) showed Initial Jobless Claims unexpectedly fell to 198K in the week ended January 10, below market expectations of 215K and down from the prior week’s revised 207K. The data confirmed that layoffs remain limited and that the labor market is holding up despite an extended period of high borrowing costs.

The Greenback may find additional support as Fed funds futures have pushed expectations for the next rate cut back to June, reflecting stronger labor market conditions and policymakers’ concerns over sticky inflation. Meanwhile, US President Donald Trump said he has no plans to dismiss Fed Chair Jerome Powell despite reported Justice Department indictment threats. Trump also indicated he could delay action on Iran while moving ahead with trade measures targeting critical minerals and AI chips.

The downside of the GBP/USD pair could be restrained as the Pound Sterling (GBP) could find support as stronger-than-expected UK monthly Gross Domestic Product (GDP) data is likely to temper dovish expectations for the Bank of England (BoE). At its December meeting, the BoE signalled that monetary policy would follow a gradual easing path.

Data from the Office for National Statistics showed the UK economy returned to growth, with GDP rising 0.3%, beating forecasts of 0.1%. This followed contractions of 0.1% in September and October after flat growth in August.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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