The Pound Sterling trades cautiously against major currencies as concerns over the UK’s economic outlook persist. Bank of England Governor Andrew Bailey warned that economic growth is expected to remain sluggish and the labor market is softening. Despite a higher-than-expected UK Consumer Price Index report for January, the British currency struggled to gain significant ground.
The year-on-year headline CPI rose by 3%, surpassing estimates of 2.8% and the December reading of 2.5%. Core CPI, excluding volatile components, grew by 3.7%, faster than the previous 3.2%. Governor Bailey stated that the acceleration in inflationary pressures is likely temporary, which won’t allow the BoE to ease monetary policy further.
The central bank recently reduced borrowing rates by 25 basis points to 4.5% but signaled a cautious policy easing outlook. On Thursday, the Pound Sterling moved slightly higher in the European trading session, trading above 1.2600 against the US Dollar. Positive market sentiment helped buoy the GBP/USD pair as investors gained confidence that geopolitical tensions might ease.
Pound Sterling navigates inflation uncertainty
US President Donald Trump’s announcement of a possible trade deal with China, despite imposing 10% tariffs on all imports from the country, had a calming effect. Optimism over a potential Russia-Ukraine truce also improved the market mood.
The Federal Open Market Committee minutes indicated that officials are likely to keep interest rates in the 4.25%-4.50% range for longer. Fed policymakers are more concerned about upside risks to inflation due to potential tariff policies than risks to the labor market. This led to expectations that businesses might pass higher input costs to consumers, boosting inflationary pressures.
Technically, the Pound Sterling aims to break above the 100-day Exponential Moving Average of around 1.2620 against the US Dollar. The 14-day Relative Strength Index struggles to hold above 60.00, indicating that bullish momentum might fizzle out. Key support for GBP/USD is seen at the February 3 low of 1.2250, while resistance lies at the 50% Fibonacci retracement of 1.2767.
Investors will closely watch UK economic data releases, including the January Retail Sales report and preliminary S&P Global UK/US PMI data for February, as well as geopolitical developments to navigate the cautious trading landscape for the Pound Sterling.
