The GBP/USD pair is gaining strength to around 1.3520 during Monday’s early Asian session. The US Dollar (USD) is under selling pressure against Cable as rate uncertainty persists. Traders will draw more conclusions from the January report on the US Producer Price Index (PPI), which will be released on Friday.
On Friday, the U.S. Supreme Court found Trump’s tariffs illegal and exceeding his authority. Trump responded by attacking the court and imposing a blanket 15% import levy. Reuters found that Trump’s replacement tariffs are in place for 150 days and it is unclear whether the United States owes importers refunds for tariffs already paid because the Supreme Court has not issued any ruling on the issue.
“It weakens the dollar in the sense that it potentially benefits economic growth outside the U.S.,” said Sim Moh Siong, currency strategist at OCBC Bank in Singapore.
Better-than-expected economic data from the UK provides some support for the pound sterling (GBP) against the US dollar. According to the Office for National Statistics (ONS), UK retail sales rose by 1.8% m/m in January, compared with an boost of 0.4% previously. This result was better than the market consensus of an boost of 0.2%. On a year-over-year basis, retail sales rose 4.5% in January, compared to 1.9% growth earlier (adjusted from 2.5%), better than the 2.8% growth estimate.
On Friday, attention will focus on the January PPI report in the US. In January, headline and core PPI are expected to boost by 0.3%. Any signs of higher inflation in the US may raise the US dollar in the near future and have adverse effects on the main currency pair.
Sterling FAQs
The pound sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. As of 2022, it is the fourth most traded currency unit in the world, accounting for 12% of all transactions, with an average value of $630 billion per day. Its key trading pairs are GBP/USD, also known as “The Cable”, which makes up 11% of FX, GBP/JPY or “The Dragon” as traders call it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The most critical factor influencing the value of the pound sterling is the monetary policy pursued by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a constant inflation rate of around 2%. The basic tool to achieve this goal is to adjust interest rates. When inflation gets too high, the BoE will try to contain it by raising interest rates, making access to credit more pricey for citizens and businesses. 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 that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to lower borrowing costs so that companies borrow more to invest in projects that generate economic growth.
The published data are used to assess the condition of the economy and may affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMIs and employment can influence the direction of the GBP exchange rate. A robust economy is good for sterling. Not only will it attract more foreign investment, but it may prompt the BoE to raise interest rates, which will directly strengthen the British pound. Otherwise, if economic data is feeble, sterling is likely to fall.
The next critical data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only benefit from the additional demand created by foreign buyers willing to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
