GBP/USD slips below 1.3700 as weak US data meets UK political jitters

Sterling eases as softer US consumption data trims Dollar losses, while UK political turmoil caps upside

Economic data in the US is not encouraging as consumer spending seems to be taking a toll, following December’s Retail Sales print. On a monthly basis, sales were unchanged from November at 0%, missing forecasts of a 0.4% increase. The so-called Control Group retail sales, used to compute Gross Domestic Product (GDP) figures, decreased by -0.1% MoM, below November’s 0.2%.

At the same time, the Employment Cost Index (ECI), a measure of labor costs, dipped from 0.8% to 0.7% in Q4, according to the US Bureau of Labor Statistics (BLS). This measure is seen as one of the better measures of labor market slack by policymakers and a predictor of core inflation.

In the UK, political turmoil is capping GBP/USD’s advance to 1.3700 as pressures over Prime Minister Keir Starmer piled in on the nomination of Peter Mandelson as ambassador to the US.

There is growing speculation among economists that Starmer, although remaining as the leader of the Labour Party, remains questionable whether he will finish as PM by the end of the year.

GBP/USD Price Forecast: Technical outlook

The GBP/USD technical picture screams consolidation, with the pair aimed to remain within the 1.3650-1.3700 figure as traders brace for the US Nonfarm Payrolls print on Wednesday.

The Relative Strength Index (RSI), although bullish, aims downwards as an indication of buyers’ reluctance to push prices higher, to retest the pair’s yearly high of 1.3868. If cleared, it paves the way for rallying to 1.4000.

Conversely, if GBP/USD slips below 1.3650, a reversal might be on the cards, with sellers eyeing the latest cycle low seen at 1.3508, before challenging the 50-day SMA at 1.3471.

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.