GBP/USD rises toward 1.2550 as US Dollar continues to correct downwards

GBP/USD strengthens as the US Dollar Index continues to face pressure for the third consecutive session.
The US Dollar could receive some support after President-elect Trump stated that his tariff policy will not be scaled back.
BRC Like-For-Like Retail Sales in the UK increased by 3.1% in December, swinging from the previous 3.4% decline.

GBP/USD continues to rise for the third consecutive day, trading near 1.2530 during Tuesday's Asian session. The pair's upward momentum is driven by a subdued US Dollar (USD). Later in the day, the US ISM Services Purchasing Managers Index (PMI) is set to be released. On Wednesday, markets will focus on the Minutes from the Federal Reserve's (Fed) December policy meeting.

The US Dollar Index (DXY), which tracks the USD's performance against six major currencies, remains under pressure for the third straight session, trading near 108.30 at the time of writing. However, the Greenback may find some support following President-elect Donald Trump's comments that his tariff policy will not be scaled back.

Trump refuted a Washington Post report suggesting his team was considering limiting the scope of his tariff plan to only cover specific critical imports. Traders are expected to closely watch developments related to Trump's tariff strategy.

The Pound Sterling (GBP) showed little movement following the release of the UK Retail Sales figures on Tuesday. The British Retail Consortium (BRC) Like-For-Like Retail Sales saw a notable 3.1% increase in December 2024, a sharp rebound from the previous month's 3.4% decline. This surge exceeded market expectations, which had forecasted a 0.2% drop, and was largely driven by robust Black Friday spending. It marked the largest monthly increase since March 2024.

Despite the December uptick, the BRC reported that overall retail performance in the fourth quarter of 2024 remained lackluster, with year-on-year sales growth of just 0.4%. For the entire year, total retail sales increased by 0.7%, while like-for-like sales rose by a modest 0.5%.

Helen Dickinson, Chief Executive of the BRC, remarked: "After a challenging year of weak consumer confidence and tough economic conditions, the crucial 'golden quarter' failed to deliver the strong finish that retailers had hoped for in 2024."

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.

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