The GBP/USD pair has seen an uptick in recent trading sessions, with the US Dollar remaining subdued due to weaker Treasury yields. The US Dollar Index, which measures the value of the USD against its major peers, is currently around 108.00 as US Treasury bond yields have declined by approximately 2%. This has led to the Pound Sterling retracing its recent losses, trading around 1.2550 during the Asian trading hours on Tuesday.
The Federal Reserve’s cautious outlook for additional rate cuts in 2025 has also contributed to the weakness in the US Dollar. The Fed’s stance on monetary policy has raised uncertainties regarding future rate adjustments amid the forthcoming economic strategies of the incoming Trump administration. This development has further supported the upside in the GBP/USD pair.
The risk-sensitive Pound Sterling may face challenges ahead due to heightened geopolitical risks, including the prolonged Russia-Ukraine conflict and tensions in the Middle East. Israel’s ambassador to the United Nations has issued a stern warning to Yemen’s Iran-backed Houthi militants, urging them to cease their missile attacks on Israel. These geopolitical tensions could add pressure to the GBP in the near term.
Additionally, traders have increased their dovish bets on the Bank of England’s policy outlook for 2025. Market expectations now project a 53-basis-point rate reduction for next year, up from the 46 bps projected following the BoE’s December 19 policy announcement. The BoE had decided to hold rates steady at 4.75% with a 6-3 vote split, highlighting the cautious sentiment surrounding the Pound Sterling.
The Pound Sterling (GBP) is the oldest currency in the world, with the United Kingdom being its official issuer. The GBP is the fourth most traded currency in the world, accounting for 12% of all foreign exchange transactions, averaging $630 billion a day. Its key trading pairs are GBP/USD (Cable), GBP/JPY (Dragon), and EUR/GBP. The value of the Pound Sterling is primarily influenced by monetary policy decisions by the Bank of England, which aims for price stability through the adjustment of interest rates.
Data releases such as GDP, Manufacturing and Services PMIs, and employment figures can also impact the value of the Pound Sterling. A strong economy and positive economic data can attract foreign investment and encourage the BoE to raise interest rates, strengthening the GBP. Conversely, weak economic data can lead to a depreciation of the Pound Sterling. Additionally, the Trade Balance indicator, which measures a country’s exports and imports, can impact the value of a currency. A positive net Trade Balance strengthens a currency, while a negative balance can weaken it.
