GBP/USD ticks higher on softer USD; lacks bullish conviction and remains below 1.2200

GBP/USD ticks higher on Monday amid the emergence of some US Dollar selling.
Expectations that the Fed might stick to its hawkish stance should limit USD losses.
Bets that the BoE will cut rates in February might contribute to capping the pair.

Haresh Menghani FXStreet

The GBP/USD pair kicks off the new week on a slightly positive note and reverses a part of Friday's decline, though the uptick lacks follow-through or bullish conviction. Spot prices currently trade around the 1.2180 region, up less than 0.10% for the day, and remain close to the lowest level since November 2023 touched last week.

The US Dollar (USD) struggles to capitalize on Friday's positive move amid expectations that the Federal Reserve (Fed) may not exclude the possibility of rate cuts by the end of this year. Apart from this, a generally positive risk tone undermines demand for the safe-haven Greenback, which is seen lending some support to the GBP/USD pair. That said, a combination of factors could act as a headwind for spot prices, warranting some caution for bullish traders.

Investors seem convinced that US President-elect Donald Trump’s protectionist policies could boost inflation and force the Fed to adopt a more hawkish stance. Moreover, the Fed is expected to pause its rate-cutting cycle later this month, which should limit the USD losses. Adding to this, the risk of stagflation, along with worries about the UK's fiscal health, might hold back traders from placing bullish bets around the British Pound (GBP) and cap the GBP/USD pair.

Furthermore, the mixed UK macro data released last week lifted bets for a 25-basis-points rate cut by the Bank of England (BoE) at the next policy meeting on February 6. Hence, it is prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has formed a near-term bottom and positioning for any meaningful appreciating move in the absence of any relevant market-moving economic data on Monday.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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