The Pound Sterling (GBP) remains steady around 1.2600 against the US Dollar (USD) as the latter loses some of its earlier gains. The US Dollar Index (DXY) stabilises near 107.40, with core Personal Consumption Expenditure (PCE) inflation showing a year-on-year decline to 2.6% for January.
The core PCE data indicates a potential delay in interest rate adjustments by the Federal Reserve, which could adversely affect the US Dollar. New tariff measures proposed by US President Donald Trump may limit further declines in USD as he announced increased levies on goods from China, Canada, and Mexico.
The GBP is responding cautiously amidst a moderate expected easing cycle from the Bank of England (BoE). Traders have accounted for two interest rate cuts, while other central banks, such as the European Central Bank (ECB), are expected to implement more cuts.
Average earnings in the UK increased to 5.9%, suggesting stronger wage growth than anticipated. BoE Deputy Governor Dave Ramsden acknowledged this growth while maintaining confidence in ongoing disinflation.
Negotiations for a trade deal between the UK and US did not reach a conclusion, although Trump expressed optimism for a swift agreement. The GBP currently faces resistance near 1.2765, with support around the 1.2333 low from February 11.
Core inflation, excluding volatile sectors, plays a key role in monetary policy, with central banks generally targeting around 2%. Data indicates that increases in inflation can lead to higher interest rates, boosting currency values, while lower inflation often has the opposite effect.
With Sterling holding near 1.2600, traders face a balancing act as US monetary policy decisions remain uncertain. The US Dollar has softened after personal consumption expenditure data revealed inflation pressures easing. At 2.6% year-on-year for January, the core measure suggests the Federal Reserve might delay adjusting rates, which in turn makes the Dollar less attractive for yield-seeking investors. Still, new trade restrictions, including those aimed at key US trading partners, may provide a counterweight to further losses.
On the UK side, expectations of two rate reductions by the Bank of England this year are already factored into market pricing. Compared to the ECB, which is likely to take a more aggressive approach to cutting rates, the BoE may take a more measured stance. Dave, who serves as Deputy Governor, pointed out that wage growth has pulled higher at 5.9%, reinforcing the view that inflationary pressures are softening, despite some resilience in earnings data.
With no breakthrough on a UK-US trade pact, uncertainty lingers over the Pound’s longer-term momentum. While Trump remains upbeat about reaching common ground, there’s little to suggest an immediate resolution. For traders navigating GBP/USD movements, resistance remains intact around 1.2765, while downside support is closer to the February low of 1.2333.
Markets continue to assess inflation trends, given their influence on rate decisions. When price pressures rise beyond central bank targets, hikes in borrowing costs tend to follow, strengthening a currency. By contrast, central banks lower rates when inflation slows, reducing appeal for investors holding that currency. Traders should keep an eye on coming data releases, particularly inflation and employment figures, as these will determine how aggressively policymakers adjust their stance in the weeks ahead.
