GBP/USD surges during the North American session on Friday by over 0.31% on stronger-than-expected Retail Sales and PMI data, even though the US Dollar (USD) trimmed losses on an upbeat Consumer Sentiment report. At the time of writing, the pair trades at 1.3542 after bouncing off daily lows of 1.3482.
Sterling rallies on strong UK data, trimming Bank of England easing expectations
In the UK, Retail Sales data sponsored a leg-up in the GBP/USD pair, which cleared the 1.3500 figure, but it remains shy of the latest cycle high, which could pave the way towards 1.3600. In December, Retail Sales rose 0.4% MoM, exceeding estimates for a 0.1% decline. Annually based, sales increased from 1.8% to 2.5%, above forecasts of 1% growth.
Business activity in the UK improved in January, according to S&P Global. The preliminary Services and Composite PMIs fared better than the December print, with Services rising from 51.4 to 54.3, and Composite rising from 51.4 to 53.9.
Bank of England (BoE) Governor Megan Greene said, “Forward indicators for wage growth are even more concerning than inflation expectations.” The BoE is expected to hold rates in February, and traders are trimming their odds for rate cuts. A day ago, money markets implied 45 basis points of easing towards the end of 2026. As of writing, they expect at least 39 basis points.
Across the pond, the University of Michigan Consumer Sentiment final reading for January rose to a five-month high of 56.4, up from 54 in the preliminary reading, above forecasts of 54. Joanne Hsu, director of the survey, said that despite the improvement, “consumers continued to report pressures on their purchasing power stemming from high prices and the propsect of weakening labor markets.”
The survey revealed that American households see a dip in inflation expectations for 1-year from 4.2% to 4% and for a five-year period at 3.3%, down from 3.5%.
Other data showed that business activity improved slightly in the US in January, S&P Global reported. Composite PMI edged up to 52.8 from 52.7. Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement, “A worryingly subdued rate of new business growth across both manufacturing and services adds further to signs that first-quarter growth could disappoint.”
Next week, traders will eye the Federal Reserve monetary policy meeting and the Fed Chair Jerome Powell press conference.
GBP/USD Price Forecast: Technical outlook
GBP/USD has broken a downslope trendline, which clears the path to challenge 1.3600. A decisive break above that level could shift the trend upward and open the door for further gains. The next key resistance level would be the July 1 swing high at 1.3788, ahead of 1.3800.
Conversely, if GBP/USD retreats below 1.3500, the first support would be the 20-day SMA at 1.3452, followed by the 200-day SMA at 1.3406.
Pound Sterling FAQs
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).
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.
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.
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.
