GBP/USD trades with negative bias around 1.2460 amid modest USD bounce

GBP/USD edges lower on Monday amid the emergence of some US Dollar buying.
Trump’s tariffs on Colombia revive trade war fears and boost the safe-haven USD.
Fed rate cut bets, sliding US bond yields cap the buck and lend support to the pair.

Haresh Menghani FXStreet

The GBP/USD pair kicks off the new week on a softer note and erodes a part of Friday's strong gains to the 1.2500 psychological mark, or a near three-week peak. Spot prices currently trade around the 1.2460 region, down 0.20% for the day amid a modest US Dollar (USD) strength, though the downtick lacks any follow-through selling or bearish conviction.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, rebounds from over a one-month low amid the flight to safety, triggered by US President Donald Trump's decision to impose import duties on Colombia. Trump imposed a 25% tariff on all imports from Colombia after the latter refused to allow two US military planes carrying deported migrants to land in the country. Trump also warned that the tariffs will increase to 50% by next week on further noncompliance, fueling concerns about global trade wars and tempering investors’ appetite for riskier assets.

Any meaningful USD appreciation, however, seems elusive in the wake of rising bets that the Federal Reserve (Fed) will lower borrowing costs twice by the end of this year amid signs of abating inflationary pressures in the US. The expectations were further lifted by Trump's comments last Thursday, saying that he will demand that interest rates drop immediately. This leads to a fresh leg down in the US Treasury bond yields, which should keep a lid on further USD gains. Moreover, the uncertainty over the prospects for a Bank of England (BoE) rate cut in February helps limit losses for the GBP/USD pair.

Market participants now look forward to the BoE's Quarterly Bulletin for some impetus ahead of the US macro data. Monday's US economic docket features the release of Durable Goods Orders, the Conference Board's Consumer Confidence Index and the Richmond Manufacturing Index. This, along with the broader risk sentiment and the US bond yields, might influence the USD price dynamics and produce short-term trading opportunities around the GBP/USD pair.

(This story was corrected on January 27 at 15:40 GMT to say Colombia, not Columbia.)

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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