Sterling Holds Steady Amid Trade Tensions and BoE Signals
Market focus remains on trade tensions, yet the British pound continues to show resilience due to its limited direct exposure to US tariffs. While uncertainty around global trade impacts sterling against traditional safe-haven currencies, it has largely supported other sterling pairs. Meanwhile, the Bank of England’s (BoE) divided vote on interest rates was balanced by an upward revision to inflation forecasts. This week, UK GDP data will be a key factor in determining sterling’s next move.
At the start of last week, sterling experienced heightened volatility due to shifts in global risk sentiment but outperformed other risk-sensitive G10 currencies. Investors appear to view the UK as less vulnerable to direct tariff threats from the US. GBP/EUR extended its gains, climbing past €1.20—four cents above its five-year average. Midweek, focus shifted to monetary policy when BoE policymaker Catherine Mann unexpectedly joined Swati Dhingra in advocating for faster rate cuts, pushing GBP/USD down toward $1.23. The BoE also downgraded its 2025 growth forecast to 0.75% from 1.5%, but a rise in near-term inflation expectations helped support sterling by driving UK gilt yields higher.
Despite a broader downtrend indicated by long-term moving averages, a recent breakout above a descending trendline suggests potential upside. A sustained move above $1.24 could open the door for gains toward $1.26.
US Jobs Report Sends Mixed Signals as Inflation Concerns Persist
January’s US employment data presented a mixed picture for investors. Job growth slowed, but wages rose, reinforcing ongoing inflation concerns fuelled by trade tensions and rising price expectations. This uncertainty helped lift the dollar ahead of the weekend, though not enough to reverse its weekly decline.
Nonfarm payrolls increased by 143k, missing the 175k consensus estimate. However, revisions to the previous two months added 100k jobs, and the unemployment rate remained at 4.0%, beating expectations of a slight uptick to 4.1%. Wage growth remained strong, with average hourly earnings rising 0.5% month-over-month, though the average workweek dropped to 34.1 hours—its lowest level since the pandemic. These dynamics suggest the Federal Reserve may maintain its current policy stance, with options markets now pricing in just two rate cuts for the easing cycle.
Euro Struggles Against Dollar as Trade Tensions Weigh on Sentiment
The euro came under pressure against the US dollar on Friday, though losses were not enough to erase gains from earlier in the week. However, the swift pullback after reaching the 50-day moving average at $1.0410 signalled investor concerns about the Eurozone’s economic outlook amid escalating trade tensions.
The dollar’s strength was further reinforced by its safe-haven appeal during times of global uncertainty. Last week’s market action highlighted both the vulnerability of global markets to shifting policies and the ability of equities to rise as long as corporate earnings continue to exceed expectations.
This week
Looking ahead, markets face a busy economic calendar this week, with key inflation data, industrial production figures, and retail sales reports set to drive sentiment. The Consumer Price Index (CPI) and Producer Price Index (PPI) will be closely watched, given renewed concerns over inflationary pressures. A stronger-than-expected reading could reinforce fears of persistent inflation, potentially influencing the Fed’s rate-cut trajectory. Key data releases this week include UK growth and industrial production figures on Thursday, while US inflation data on Wednesday will also influence GBP/USD movements.
Investor focus will turn to key survey data to assess whether the European economy has found a floor. The ZEW surveys for Germany and the broader Eurozone, along with the EU’s flash consumer confidence reports, will take centre stage. The week will wrap up with the Flash Purchasing Managers’ Index (PMI) on Friday, a crucial forward-looking indicator. For EUR/USD to hold above $1.03 and establish a bottom, the euro will need support from stronger domestic data, especially as trade tensions continue to escalate.
