The British Pound is experiencing a rise against the US Dollar, hovering around the 1.2900 mark, just ahead of the anticipated US inflation report for February. Concerns about a potential economic slowdown triggered by tariffs have boosted expectations for the Federal Reserve to adopt a more dovish stance. Meanwhile, officials from the Bank of England are advocating for a cautious and gradual approach to potential interest rate cuts.
On Tuesday, during the North American trading hours, the Pound Sterling was trading close to a four-month high, hitting around 1.2930 against the US Dollar. The GBP/USD pair remained strong as the US Dollar Index, which evaluates the dollar’s strength against a basket of six major currencies, continued to weaken, nearing 103.30. This movement comes just ahead of the release of the US Consumer Price Index (CPI) data for February, scheduled for Wednesday.
Traders are eagerly awaiting the US inflation figures, as they will heavily influence the market’s expectations regarding the Federal Reserve’s future monetary policy. The year-on-year headline inflation is anticipated to have risen by 2.9%, showing a slight decrease from 3% in January. The core CPI, which excludes unpredictable food and energy prices, is expected to slow down to 3.2% from the previous 3.3%.
Recently, there has been a notable shift among traders who are increasingly betting on the Fed to initiate interest rate cuts by May, driven by fears of an economic slowdown influenced by President Donald Trump’s tariff policies. Data from the CME FedWatch tool reveals the probability of a rate cut in May has jumped to 51%, up from 37% the previous day.
Nonetheless, several Federal Reserve officials, including Chair Jerome Powell, are advocating for a prudent “wait and see” approach, given the lack of clarity surrounding President Trump’s policies on tariffs and taxes. Powell stated on Friday that, “Uncertainty around Trump administration policies and their economic effects remains high, and the net effect of trade, immigration, fiscal, and regulation policy is what matters for the economy and the monetary policy.”
On another note, the January Job Openings and Labor Turnover Survey (JOLTS) report from the US showed that employers posted 7.74 million new jobs, aligning closely with estimates and slightly surpassing December’s 7.51 million.
Turning to the UK market, the British Pound is outperforming most of its counterparts, except for the Euro, as traders reassess the likelihood of the Bank of England’s (BoE) dovish measures. Confidence is growing among traders that the BoE will keep interest rates unchanged for an extended period, bolstered by strong wage growth fueling inflation in the services sector in the UK.
Just last week, BoE leaders, including Governor Andrew Bailey, hinted at a more gradual approach to easing monetary policy, emphasizing that the persistence of inflation is unlikely to disappear without intervention. However, Catherine Mann from the BoE’s Monetary Policy Committee voiced support for a more aggressive monetary expansion, citing “substantial volatility” in financial markets, particularly due to “cross-border spillovers.”
Looking ahead this week, investors will keep a close eye on the UK’s monthly GDP and factory data for January, due on Friday. It’s expected that the UK economy might have grown modestly by 0.1%, a decrease from the 0.4% growth recorded in December.
From a technical viewpoint, the Pound Sterling is showing signs of strength, comfortably sitting above the 1.2900 level. On Tuesday, the currency managed to break past the 61.8% Fibonacci retracement level, calculated from a high in late September to a low in mid-January, around the 1.2930 mark. This has turned the long-term outlook for the GBP/USD pair bullish, as it holds above the 200-day Exponential Moving Average, which is approximately at 1.2692.
The 14-day Relative Strength Index (RSI) is also above 60.00, indicating strong bullish momentum. Looking at potential support levels, the 50% Fibo retracement at 1.2767 and the 38.2% Fibo retracement at 1.2608 are key points to watch. On the upside, the psychological resistance level around 1.3000 remains a significant barrier.
