Published: January 16th, 2025
The Pound to Dollar (GBP/USD) rate is looking at another week of declines and analysts believe it will remain under pressure in the coming days.
An analysis by Barclay’s FX strategy unit said that GBP ‘is staying close to a 14-month low against USD as traders adopt an increasingly negative view of the Starmer government’s fiscal plans. We see higher bond yields forcing a reduction in growth-positive spending by Westminster.’
The outlook is downbeat, Barclay’s adds, and the direction of travel points to the downside. ‘As technical conditions deteriorate, the pair could definitely push lower.'
The bank’s analysts note, however, that GBP/USD is showing signs of being technically oversold. Its Relative Strength Index is approaching 30, which suggests either a bounce back or at least a bout of consolidation.
Nevertheless, traders shouldn't expect a strong rebound since most signs point to only tepid short-term upticks in GBP strength unless sentiment turns decisively positive. That would require a significant directional change by Chancellor Rachel Reeves focused on stabilizing the UK's fiscal footing.
Some Westminster watchers believe cuts are coming to spending on benefits, which would reduce the size of Britain’s bloated welfare state. While Reeves announced added spending on benefits in the October 2023 budget and higher taxes to fund them, negative post-budget data has spooked investors.
Recent prints have shown that economic growth has stalled, and unemployment is on the rise. Many now have doubts about Britain’s ability to meet its debt obligations. The UK’s relatively isolated and open economy doesn't the flexibility of a continental market like NAFTA or the Eurozone. Surging debt costs and declining GBP exchange rates are strong signals that Reeves should change course
In August of 2024, Sterling experienced an extended selloff against a backdrop of sinking global stock markets and worries that the US economy was faltering.
The Pound to Euro rate dropped 0.60 per cent on Friday 2nd August after the Bank of England (BoE) cut interest rates by 25 basis points. Then on Monday 5th August, US equities markets fell after earnings from big technology companies came in well below expectation.
A research note from HSBC’s currency strategy unit said the confluence of those factors created additional selling pressures in the Asian session, when Japan’s Nikkei 225 index fell by more than over five per cent. ‘In our view, such a steep and sudden decline points to a wider bout of global risk aversion.’
Risk-averse sentiment can negatively impact Sterling, which was already feeling the pressure after Threadneedle Street policymakers made their most recent rate cut. The Pound to Euro conversion fell below 1.18 on Tuesday 6th August to touch 1.1773, a level last seen in early July.
Historically, GBP tends to lose value against USD, EUR, CHF and Yen when market sentiment turns gloomy. It can also gain against 'high beta' currencies like the Norwegian Krone and the Australian and New Zealand dollars.
‘Stock markets fell globally last Friday as fear trading took over in advance of the crucial US job print,’ wrote HSBC analysts. ‘Many sectors are experiencing a selloff, with tech firms suffering worst after investors punished Intel, Amazon, Apple and others for poor earnings.’
In April, The GBP/EUR exchange rate moved to the 1.17 threshold following publication of GDP figures showing Britian’s UK economy grew 0.1 per cent month-on-month in February 2024, while an upward revision to January's figure (from 0.2. per cent to 0.3 per cent) added to the good news.
The combined numbers from the Office of National Statistics (ONS) effectively guarantee that the quarterly figure will indicate a return to growth, ending the low-level recession seen in the second half of 2023. A Q1 contraction would mean that UK GDP declined by a full percentage point in March, something economists see as highly unlikely.
Sterling was up against most of its peers on Tuesday, 16th April, though the Pound to Dollar rate struggled to get beyond 1.2537 thanks to a broader Greenback rally driven by the release of strong US inflation and labor market prints.
Production output drove the majority of UK growth in February, expanding by 1.1 per cent. The UK’s large services sector grew by 0.1 per cent in February and by 0.3 per cent in January. Analysts said any upside potential from the GDP figures could be hemmed in by the relatively small advance in the figures.
A note investors from Barclays Currency Strategy Unit said 'we would need to see a series of exceptional GDP prints to indicate that the UK economy is robust enough to kindle an upside inflation surprise similar to what we’ve seen in America recently.’
Sterling started the second week of March 2024 softer following publication of a UK job market survey by global consultancy KPMG that confirmed a previous slowdown in wage increases had become bedded-in.
The survey revealed that the rate of salary inflation for permanent job placements had sunk to a three-year low. An index of permanent staff salaries dropped to 55.1 in February from 55.7 in January. For comparison, the index averaged 60.0 from 2015-2020.
The news sent the Pound to Euro exchange rate down from 1.1749 to 1.1729 as GBP shed some gains after ending the previous week on a strong footing.
Pantheon Macroeconomics told Bloomberg that the KPMG figures were highly credible given that its survey methodology has a 25-year track record of capturing shifts in wage growth. ‘The latest survey results suggest that Bank of England policymakers need to cut interest rates soon.’
While Sterling may have settled back naturally after experiencing a late advance last week, the KPMG survey confirmed the official ONS wage report, which also showed that UK wage increases had cooled significantly, opening the door for Threadneedle Street to cut interest rates in the coming months.
