GBP/USD softens below 1.3700 as Trump picks Warsh for Fed

GBP/USD softens to near 1.3670 in Monday’s early European session.
Easing concerns over the Fed’s independence and hotter PPI inflation underpin the US Dollar.
The Bank of England is expected to leave interest rates unchanged at 3.75%

Lallalit Srijandorn FXStreet

The GBP/USD pair loses ground to around 1.3670 during the early European session on Monday, pressured by renewed US Dollar demand. Signs of political stability in the United States (US) provide some support to the Greenback against the Pound Sterling (GBP). Traders will take more cues from the US ISM Manufacturing Purchasing Managers Index (PMI) data later on Monday.

US President Donald Trump said on Friday that Kevin Warsh, who prefers a smaller central bank balance sheet, would be his pick for the next Fed chair. Markets anticipate that Warsh may lean toward a smaller Fed balance sheet and hold the interest rate higher for longer, which provides some support to the USD and creates a headwind for the major pair.

Hotter-than-expected US producer price inflation might contribute to the US Dollar’s upside, as it could further strengthen the case for the Fed to hold rates steady. The Bureau of Labor Statistics revealed on Friday that the US Producer Price Index (PPI) climbed 3.0% YoY in December, beating the forecast of 2.7%. On a monthly basis, the PPI rose 0.5% MoM in December, above the market consensus and the previous reading of 0.2%.

On the Cable front, the Monetary Policy Committee voted 5-4 to cut the bank rate in December, the fourth quarter-point reduction of 2025. But most of its policymakers suggested the pace of rate cuts could slow. The Bank of England (BoE) is expected to keep its benchmark rate at 3.75% on Thursday, with Governor Andrew Bailey and colleagues keeping their options open.

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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