Pound Sterling Gains Amid BoE’s Cautious Policy Stance.
The Pound Sterling (GBP) is showing signs of resilience against its major currency counterparts as investors anticipate a more measured approach to monetary easing by the Bank of England (BoE) compared to other central banks. While markets priced in two rate cuts by the BoE, the European Central Bank (ECB) expected to take a more aggressive stance with three cuts, and the Federal Reserve (Fed) projected to reduce rates by 60 basis points (bps) this year.
Adding to market volatility, former US President Donald Trump has announced a fresh wave of tariffs on China, Canada, and Mexico, escalating concerns about a renewed global trade war. Investors are also closely monitoring the release of the US Personal Consumption Expenditures (PCE) Price Index data, which will provide key insights into the Fed’s future policy direction.
This article delves into the key market drivers influencing the GBPUSD currency pair, global trade tensions, inflation trends, and broader economic outlooks shaping investor sentiment.
Pound Sterling Strengthens Amid Expectations of a Slower BoE Easing Cycle
The British currency found support in recent sessions due to market expectations that the BoE’s policy easing cycle will be more gradual compared to other major central banks. Two BoE rate cuts currently priced in for 2024, in contrast to the ECB’s more aggressive three-cut approach and the Fed’s potential 60-bps reduction.
A key factor influencing the BoE’s cautious stance is the strong wage growth in the UK. The latest data showed that average earnings (excluding bonuses) accelerated to 5.9% in the three months ending December 2024. This marks the highest wage growth level since April 2024, reinforcing concerns that inflationary pressures remain persistent.
BoE Deputy Governor Dave Ramsden, speaking at Stellenbosch University in South Africa, acknowledged that wage growth is stronger than expected. However, he reassured markets that the underlying disinflationary process remains intact. Ramsden’s comments suggest that while the BoE is aware of wage-driven inflation risks, it remains committed to a gradual and data-driven approach to monetary easing.
The GBPUSD pair, which initially showed strength, faced some resistance near 1.2570 in Friday’s European session. The US Dollar (USD) has been gaining traction amid a risk-off sentiment fueled by renewed global trade tensions.
US-China Trade Tensions Resurface: Trump’s Tariff Plan Sparks Concerns
Adding to market unease, Donald Trump has announced fresh 10% tariffs on China, alongside plans to impose 25% duties on imports from Canada and Mexico starting March 4, 2025.
Trump cited concerns over fentanyl trafficking, which he claims is being manufactured in and supplied by China. He also confirmed that there would be no additional extension for North American allies Canada and Mexico, citing the ongoing issue of drug trafficking into the US.
Trump’s latest trade policy move is seen as a major escalation in the ongoing US-China trade war, which has already had significant consequences for global supply chains and economic growth. If implemented, these tariffs could:
1. Increase Inflationary Pressures: Higher tariffs on Chinese goods may push up prices for US consumers, adding inflationary pressures at a time when the Fed is already struggling to control price levels.
2. Slow Global Economic Growth: New trade barriers could weaken global demand, negatively impacting export-driven economies like China and Germany.
3. Boost Demand for Safe-Haven Assets: Market volatility could drive investors toward safe-haven currencies like the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF).
While the trade war rhetoric continues, Trump left the door open for negotiations with the UK. Following a meeting with UK Prime Minister Keir Starmer, he stated that there was a “very good chance” of a US-UK trade deal that could eliminate the need for tariffs. Trump suggested that such a deal could be reached “pretty quickly,” as reported by the BBC.
US PCE Inflation Data in Focus: Implications for the Federal Reserve
Investors are also awaiting the release of the US Personal Consumption Expenditures (PCE) Price Index for January, scheduled for 13:30 GMT on Friday. This is the Federal Reserve’s preferred inflation gauge and could play a crucial role in shaping future monetary policy decisions.
Market Expectations:
Core PCE inflation (YoY) expected to slow to 2.6% from 2.8% in December.
Month-over-month PCE inflation is estimated to increase by 0.3%, up from 0.2% in the previous reading.
If the data aligns with expectations or comes in lower than forecast, it could strengthen market bets on Fed rate cuts in 2024. However, if inflation remains stubbornly high, the Fed may adopt a more cautious approach, delaying rate cuts further into the year.
The US Dollar Index (DXY) has already moved higher to 107.45, indicating that investors are hedging against potential surprises in the inflation data. A stronger-than-expected reading could further boost the USD and weigh on risk-sensitive currencies like the GBP and EUR.
GBPUSD Outlook: Key Levels to Watch
The GBPUSD pair remains under pressure, currently trading near 1.2570, as the US Dollar gains momentum in a risk-averse market environment.
Technical Analysis:
Support Levels: 1.2520, 1.2475
Resistance Levels: 1.2600, 1.2650
If US inflation data comes in softer than expected, the GBPUSD pair could find support and attempt a rebound toward 1.2600. However, stronger inflation data or escalating trade tensions could push the pair below 1.2520, opening the door for further downside.
Conclusion: A Market at Crossroads
The Pound Sterling is benefiting from expectations that the Bank of England will maintain a measured pace of rate cuts compared to the ECB and the Fed. However, strong UK wage growth remains a concern, potentially limiting the BoE’s ability to ease aggressively.
Meanwhile, Donald Trump’s latest tariff threats against China, Canada, and Mexico have rattled markets, raising fears of a renewed global trade war. The implications of these tariffs remain uncertain, as they could either stoke inflation or slow economic growth.
Investors also laser-focused on the upcoming US PCE inflation data, which will be a key determinant of the Federal Reserve’s rate policy. A weaker-than-expected reading could reinforce expectations of rate cuts, weakening the USD and supporting GBP/USD. On the other hand, stronger inflation figures could further strengthen the USD, putting additional pressure on the Pound.
As the global economic landscape continues to shift, traders and investors must remain vigilant and closely monitor policy signals from major central banks, geopolitical developments, and key economic indicators. The coming weeks will be crucial in determining the next major move for GBPUSD and broader financial markets.
