Pound Sterling trades cautiously despite UK Starmer anticipates turnaround in economy

• The Pound Sterling trades with caution even though UK PM Starmer confirms to have good trade relations with the US.
• Investors expect the Fed to call a pause in the current policy-easing cycle.
• Morgan Stanley has revised the UK GDP growth rate for 2025 lower to 0.9%.

The Pound Sterling (GBP) faces pressure against its major peers in Tuesday's North American session. The British currency trades cautiously despite United Kingdom (UK) Prime Minister Keir Starmer's positive commentary on the economic outlook in an interview with Bloomberg on Tuesday. Starmer said that the number one priority of the Labour government is "growth" and the economy is starting to "turn around." On the outlook of trade relations with the United States (US), Starmer commented: “We’ve got a huge amount of trade between our two countries already and the base is there for even better trading relations. We need to build on that.” 

Starmer's positive comments have fuelled some strength in the Pound Sterling, which was trading cautiously amid worries that the economy could face risks of stagflation amid weakening labor demand and a stubborn inflation outlook.

The hiring momentum in the UK private sector has been hit hard since Chancellor of the Exchequer Rachel Reeves raised employers’ contribution to National Insurance (NI) in the Autumn Budget. The preliminary S&P Global Purchasing Managers Index (PMI) report for January showed that employment levels have decreased for the fourth month running, which businesses often linked to rising cost pressures. The agency added that many firms suggested that the forthcoming hike in “employers’ NI” contribution had resulted in “cutbacks to recruitment plans”, while others cited the impact of a post-Budget slump in business confidence.

Though the UK Consumer Price Index (CPI) for December came in softer than expectations and November’s reading, it is expected to remain broadly sticky as private firms pass on the impact of higher wage growth, energy prices, and prices paid for imported raw materials to consumers. The inflation rate was the steepest for just over one-and-a-half years in both the manufacturing and services sectors, S&P Global reported.

Weak employment and higher inflation are expected to lead to stagflation in the UK economy. This will pose a bigger risk for the Bank of England (BoE), which is scheduled to announce its first monetary policy decision of 2025 on February 6. Traders are pricing in a 25 basis point (bps) interest rate reduction, pushing borrowing rates to 4.5% amid the weak economic outlook.

Investment banking firm Morgan Stanley has revised its forecast for the UK’s Gross Domestic Product (GDP) growth lower to 0.9% for the year from 1.3%, citing signs of a slowdown in labor demand and faltered economic prospects.

Daily digest market movers: Pound Sterling weakens against US Dollar amid jittery market mood 

• The Pound Sterling is down below 1.2450 against the US Dollar in Tuesday’s European session after failing to break above the psychological resistance of 1.2500. The GBP/USD falls sharply as the safe-haven appeal of the US Dollar has increased amid a dismal market mood.
• The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to near 108.00 after a sharp sell-off in power, data center, and companies offering top chatbot stocks across the globe have strengthened its appeal as a safe-haven. Global technology stocks nosedive amid worries that Chinese DeepSeek’s Artificial Intelligence (AI) model could disrupt the global market, given its at-par performance against US chatbots like OpenAI and Meta without relying on higher energy demand and sophisticated semiconductor chips.
• Apart from that, deepening fears of tariffs by United States (US) President Donald Trump and uncertainty over the Federal Reserve’s (Fed) monetary policy announcement on Wednesday are acting as tailwinds for the US Dollar.
• US Treasury Secretary Scott Bessent has proposed imposing a 2.5% tariff universally and has also guided to increase by the same amount every month, Financial Times (FT) reported. Market participants expect that a gradual approach to tariff hikes would be favorable for the US and other nations in negotiating a deal.
• Meanwhile, the Fed is almost certain to announce a pause in the current policy-easing spell and keep interest rates unchanged in the range of 4.25%-4.50% on Wednesday. However, the Fed's monetary policy guidance is expected to be slightly hawkish due to the stubborn inflation outlook and stable labor demand. 
• On the economic front, US Durable Goods Orders surprisingly declined in December. Fresh orders for Durable Goods contracted by 2.2%, while it was expected to have grown by 0.8%. In November, the economic data was contracted by 2%, downwardly revised from 1.1%.

Technical Analysis: Pound Sterling remains above 20-day EMA

The Pound Sterling faces selling pressure against the US Dollar on Tuesday after failing to extend its upside above the 50-day Exponential Moving Average (EMA), which trades around 1.2500. However, the near-term outlook of the GBP/USD pair remains firm as it holds the 20-day Exponential Moving Average (EMA), which trades around 1.2390. 

The 14-day Relative Strength Index (RSI) moves higher above 50.00 from the 20.00-40.00 range, suggesting that the bearish momentum has ended, at least for now.

Looking down, the January 13 low of 1.2100 and the October 2023 low of 1.2050 will act as key support zones for the pair. On the upside, the December 30 high of 1.2607 will act as key resistance.