GBP/USD strengthens above 1.3400 as UK inflation beats forecasts
- GBP/USD strengthens to around 1.3435 in Thursday’s early European session.
- UK CPI inflation grew at a faster-than-projected pace in December, supporting the Pound Sterling.
- Trump said he would not impose tariffs, easing geopolitical and trade tensions.
The GBP/USD pair gains ground to near 1.3435 during the early European session on Thursday. The Pound Sterling (GBP) edges higher against the US Dollar (USD) as UK inflation rose more than expected in December. Markets might turn cautious later in the day ahead of a slew of US economic data.
The Cable receives some support from a hotter-than-expected UK Consumer Price Index (CPI) inflation report. The headline CPI rose 3.4% YoY in December, compared to an increase of 3.2% in November, the Office for National Statistics showed on Wednesday. This reading came in above the market consensus of 3.3%. The monthly CPI inflation climbed to 0.4% in December from a decline of 0.2% in November. Markets projected a rise of 0.4%.
Nonetheless, US President Donald Trump on Wednesday withdrew a threat to impose tariffs on a number of European nations, easing geopolitical and trade tensions. This, in turn, could lift the Greenback against the GBP. Trump also said that he has reached a framework for a deal with NATO over Greenland, but did not offer any details in a post to his Truth Social platform about what that would entail.
Traders will keep an eye on the final reading of US Gross Domestic Product (GDP) for the third quarter (Q3), weekly Initial Jobless Claims and Personal Consumption Expenditures (PCE) Price Index data. If these reports show better-than-expected outcomes, this could underpin the USD and create a headwind for the major pair.
(This story was corrected on January 22 at 07:31 GMT to say, in the first paragraph, that today is Thursday.)
Pound Sterling FAQs
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).
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.
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.
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.
