The United Kingdom's Gross Domestic Product (GDP) growth has remained stagnant throughout the third quarter, as well as during the October-November period. This economic standstill comes at a time when the Bank of England (BoE) is poised to make a significant decision regarding interest rates. The BoE is widely expected to cut interest rates by 25 basis points, bringing them down to 4.5%, with an anticipated vote split of 8-1 in favor of the cut. This decision is crucial as inflationary pressures in the UK have decelerated faster than anticipated in December.
Meanwhile, across the Atlantic, the United States (US) employment data is set to drive market speculation concerning the Federal Reserve's (Fed) future interest rate strategy. The Pound Sterling (GBP) has risen above the significant psychological level of 1.2500 against the US Dollar (USD). However, the GBP/USD pair is experiencing volatility, with the 50-day Exponential Moving Average (EMA) fluctuating within its current trading zone.
Analysts at Citi have predicted a potential uptick in inflation due to rising wage growth and a possible reversal in energy prices. Adding to the global economic complexity, President Trump has temporarily suspended 25% tariff orders on Canada and Mexico for 30 days, potentially alleviating some trade tensions.
The GBP/USD pair continues to face challenges, particularly as it edges lower while the US Dollar attempts to regain strength before the release of the US Nonfarm Payrolls (NFP) data for January. The pair is also feeling the impact of anticipated policy divergence between the Fed and BoE. Support zones for the GBP/USD pair are marked by the January 13 low of 1.2100 and the October 2023 low of 1.2050.
The US Dollar experienced a sharp sell-off during the first three trading days of the week, driven by reduced fears of a global trade war. Fed Chair Jerome Powell has indicated that any monetary policy adjustments by the Fed will depend on "real progress in inflation or at least some weakness in the labor market". Recent employment readings suggest that the US labor force is growing at a declining pace.
The CME FedWatch tool suggests that the Fed is expected to announce its next interest rate cut during its June policy meeting. This anticipated move could significantly influence market dynamics and investor sentiment.
Inflationary pressures in the UK have eased more rapidly than expected in December, providing some relief to policymakers. However, analysts warn that this trend may reverse due to increasing wage growth and changes in energy prices. As a result, market participants are closely monitoring developments in both wage growth and energy markets.