Pound Sterling declines below 1.3500 on UK political uncertainty, US PPI data eyed

GBP/USD edges lower to around 1.3485 in Friday’s early Asian session.
The Gorton and Denton by-election increases political uncertainty in the UK, weighing on the Pound Sterling.
Traders will closely monitor the Gorton and Denton by-election outcome and the US January PPI report later on Friday.

Lallalit Srijandorn FXStreet

The GBP/USD pair loses ground to near 1.3485 during the early Asian session on Friday. The Pound Sterling (GBP) weakens against the Greenback amid rising UK political uncertainty surrounding the Gorton and Denton by-election.

Manchester's Gorton and Denton constituency was held on Thursday. The result is still being counted and is expected on Friday between 3:00 am and 4:00 am GMT. This event is viewed as a significant test for UK Prime Minister Keir Starmer, amid internal party discontent and low approval ratings. Political risks in the UK could undermine the GBP against the USD in the near term.

"A defeat for the Labour party could increase pressure on Keir Starmer’s position as prime minister and would add to Labour party concerns over their sliding popularity ahead of the local elections in May,” said Lee Hardman, an analyst at MUFG.

On the other hand, US policy fog might cap the downside for the major pair. The US Supreme Court ruled last week that the emergency powers law used by Trump to impose tariffs did not authorize his policy regime, according to the BBC.

The US President responded by imposing a new 10% global tariff, using legislation that allows him to impose import taxes for 150 days without congressional approval. The next day, Trump threatened to raise it to 15%.

Traders will keep an eye on the US January Producer Price Index (PPI) report, which is due later on Friday. Any signs of hotter-than-expected inflation in the US may delay the US Federal Reserve (Fed) interest rate cuts and lift the USD in the near term.

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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