GBP Falters, USD Surges: What’s Driving the Markets?.
- GBP Weakens: GBP/USD fell 1% last week, with UK bond selloffs fueling concerns over fiscal management, higher taxes, and spending cuts under Chancellor Rachel Reeves.
- USD Strengthens: The US Dollar hit a 14-month high against GBP, bolstered by strong non-farm payroll data, robust services PMI, and President-Elect Trump’s tariff policies.
- Inflation Focus: UK inflation is expected to remain steady, while US inflation is forecast to rise, potentially influencing central bank rate expectations and currency movements.
- Data Highlights: UK GDP (modest 0.1% growth expected) and retail sales reports, alongside US retail sales, could shape GBP/USD dynamics this week.
- EUR Struggles: The Euro remains under pressure from USD strength and speculation of an ECB rate cut, compounded by a lack of significant Eurozone data.
GBP:
At the time of writing, GBP/USD is trading near $1.2295, down 1% from its opening level.
The Pound (GBP) faced pressure last week as a selloff in UK government bonds raised concerns about looming tax hikes and spending cuts under Chancellor Rachel Reeves.
Rising bond yields pushed up government borrowing costs, reducing fiscal flexibility and exacerbating the UK’s debt challenges.
Michael Brown, Senior Research Strategist at Pepperstone, noted that higher bond yields and a weaker Pound signal diminishing investor confidence in the government’s ability to manage fiscal policy, warning of a precarious financial outlook.
Amid these worries, GBP exchange rates dropped sharply as confidence in UK assets waned.
USD:
The US Dollar (USD) had a mixed start last week, initially slipping due to reports suggesting President-Elect Donald Trump might take a less aggressive stance on trade tariffs.
Since tariffs are inflationary, such a shift could impact Federal Reserve interest rate decisions.
However, USD rebounded after a stronger-than-expected ISM services PMI report, signaling robust services activity in December.
Trump later denied reports of softening his tariff plans and hinted at declaring a national economic emergency to enforce tariffs quickly, boosting USD demand further.
By Friday, the Dollar hit a 14-month high against GBP following a blowout non-farm payrolls report. The US added 256,000 jobs in December, far exceeding forecasts, while the unemployment rate dropped to 4.2%, driving USD strength.
Looking Ahead:
Key events this week include the UK and US consumer price index (CPI) reports.
- UK inflation is expected to remain steady, but a drop in core inflation from 3.5% to 3% could weigh on GBP by reinforcing expectations of easing price pressures and potential BoE rate cuts.
- US inflation is forecast to rise from 2.7% to 2.9%, which may dampen Fed rate cut expectations and further strengthen USD.
Investors will also watch UK November GDP figures on Thursday, where a modest 0.1% growth could provide limited support for GBP, given its sluggish pace.
Friday’s UK retail sales report might offer a boost if it shows growth, while US retail sales data, also due this week, could bolster USD if it outperforms.
EUR:
The Euro (EUR) struggled on Friday as its inverse relationship with a strong USD weighed on the currency.
Speculation about an imminent European Central Bank (ECB) rate cut added to the Euro’s struggles, leaving it without clear direction amid a lack of major Eurozone data.