GBP/USD exchange rate soars to five-year high in January
Following a relatively subdued start to the year, the pound dollar exchange rate jumped over 1% into the 1.35 mid-range on 5 January. The move higher was made after a weaker-than-expected ISM manufacturing PMI undermined the US currency.
The pound hit its highest level against the dollar since mid-September the following day, bolstered by improved global investor sentiment, easing concerns about the UK economy’s fiscal position, and hints of Britain seeking a closer relationship with Europe. The UK currency couldn’t cling onto its gains after the UK’s final services PMI for December undershot forecasts, damaging investor confidence.
By 9 January, the pound had slumped to within a fraction of the 1.34 benchmark against the dollar amid a UK data lull, downbeat UK rail sales data for December, a risk-off market mood, and diminishing Fed rate cut expectations.
The pound dollar rate rose sharply to around 1.347 on 12 January following reports that the US Department of Justice is investigating Federal Chair Jerome Powell. The probe was reportedly prompted by Powell’s refusal to comply with Donald Trump’s calls for further rate cuts, unsettling dollar investors concerned about the central bank’s independence.
The dollar firmed the next day after the US consumer price index for December showed that headline and core inflation remained above the Fed’s 2% target. The print strengthened expectations that the central bank will hold interest rates steady for the time being, providing support for the US currency.
The pound slipped below the 1.34 benchmark on 15 January, even though UK GDP exceeded expectations in November, dampening arguments for BoE interest rate cuts in February. Meanwhile, the dollar was supported by a surprise decline in US jobless claims, reinforcing expectations that the Fed may resist cutting rates until June.
The pound dollar rate recovered to within touching distance of 1.35 on 20 January following fresh tariff threats from President Donald Trump. With investors concerned that tariffs could trigger a transatlantic trade dispute and prompt European nations to reduce purchases of US Treasuries, their confidence in the US currency was undermined.
The pound rose to a six-month high versus the dollar on 23 January, breaking through the 1.36 resistance level following stronger-than-expected UK retail sales and business activity figures.
The pound surged to within touching distance of the 1.38 benchmark – its highest level since October 2021 – following a dollar fire sale on 27 January. The notable US currency selloff was triggered by mounting fears of another US government shutdown, potential political pressure on the Fed, and renewed Trump tariff threats aimed at Canada and South Korea.
The pound slid into the 1.36 range on 30 January after dollar sentiment was bolstered by Donald Trump’s nominee for the next Federal Reserve Chair. Kevin Warsh, a former Fed Governor, is considered the most credible and least dovish option from the President’s shortlist, with markets hopeful his appointment could safeguard the central bank’s independence.
The pound dollar exchange rate ended the month around 1.369.
GBPUSD: 3-Month Chart
Looking Ahead
Investors have effectively written off the prospect of a BoE interest rate cut on 5 February after UK inflation rose more than expected in December.
Influential data from the UK economy in February: GDP (12 February), ILO unemployment Rate (12 February), Consumer Price Index (18 February), Retail Sales (20 February), S&P Global Composite PMI (20 February).
Influential data from the US economy in February: ISM Manufacturing PMI (2 February), ADP Employment Change (4 February), ISM Services PMI (4 February), Average Hourly Earnings (6 February), Nonfarm Payrolls (6 February), Consumer Price Index (11 February), Producer Price Index ex Food & Energy (13 February), Michigan Consumer Sentiment Index (13 February), Retail Sales (17 February), GDP (20 February), Core Personal Consumption Expenditures – Price Index (20 February, S&P Global Composite PMI (24 February).