The Pound Sterling (GBP) witnessed a steep correction against the US Dollar (USD), sending GBP/USD down from four-month highs of 1.3568 to test the weekly low near 1.3400.
Pound Sterling pounded on USD resurgence, geopolitics
An impressive USD recovery and simmering geopolitical tensions globally remained major headwinds to GBP/USD’s uptrend, fueling a notable retracement during the past week.
Safe-haven demand for the Greenback surged at the start of the week as markets took into account the United States’ (US) military aggression in Venezuela and the capture of the former President Nicolas Maduro over the weekend.
Markets remained concerned that the US-Venezuela conflict could extend into other countries such as Mexico and Colombia.
The risk-off market environment weighed on the higher-yielding Pound Sterling, exerting additional downside pressure on the pair.
The dovish Fed bets soon returned to the fore and smashed the USD alongside the US Treasury bond yields after the US ISM Manufacturing PMI declined to 47.9 in December, against the forecast of 48.3.
However, the USD pullback was only temporary and seen as a profit-taking move heading into a fresh batch of US employment data releases midweek.
Data released by the Bureau of Labor Statistics (BLS) on Wednesday showed that Job Openings, a measure of labor demand, dropped 303,000 to 7.146 million by the last day of November, against expectations of a 7.6M figure.
The ADP report showed that private employment in the United States (US) increased by 41,000 jobs last month after a revised decrease of 29,000 in November. The market forecast was for a 47,000 growth.
Further, the Institute for Supply Management’s index of services rose 1.8 points to 54.4, the highest since October 2024. The mixed US macro news kept the USD upside limited.
Greenback buyers jumped back into the game in the second half of the week, as geopolitical tensions ramped up worldwide. Russia deployed submarine and other naval vessels to escort an aging oil tanker off the coast of Venezuela, according to the Wall Street Journal (WSJ).
Meanwhile, the White House separately confirmed discussions about acquiring Greenland, including potential military involvement. China banned exports of dual-use items to Japan for potential military uses, citing national security concerns.
Subsequently, the selling interest around the Pound Sterling intensified amid relentless USD demand, as GBP/USD hit its lowest level in the week near 1.3415.
Another catalyst behind the USD’s rise on Thursday was the US recording its lowest trade deficit since 2009, which boosted Gross Domestic Product (GDP) growth forecasts.
On Friday, GBP/USD entered a consolidation phase at around 1.3450 as the mixed employment data from the US failed to trigger a significant market reaction. The US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls rose by 50,000 in December, compared to the market expectation of 60,000. On a positive note, the Unemployment Rate edged lower to 4.4% from 4.6% in November.
All eyes on US inflation and UK growth figures
Following a week dominated by US employment numbers, the focus is now on the consumer inflation and sales data in the week ahead.
Monday is devoid of any high-impact macro news, and hence, Tuesday’s US Consumer Price Index (CPI) report will be eagerly awaited for fresh hints on the Fed’s rate cut outlook, which will significantly affect the USD performance and the GBP/USD price action.
On Wednesday, the US Retail Sales and Producer Price Index (PPI) data will be released, followed by the Existing Home Sales report.
Thursday will feature the monthly British Gross Domestic Product (GDP) alongside the Industrial and Manufacturing Production data. Meanwhile, the weekly Unemployment Claims data will be watched from the US later that day.
Finally, it’s a relatively quiet end to the week on Friday, with no top-tier economic data on the radar.
Besides these statistics, the focus will also be on the geopolitical developments surrounding the US, Venezuela, and also between China and Japan. Any further geopolitical escalation could bode ill for the risk-sensitive Pound Sterling, while rendering positive for the safe-haven USD.
GBP/USD Technical Analysis
In the daily chart, GBP/USD trades at 1.3436. The 20-day Simple Moving Average (SMA) rises above the 50-, 100-, and 200-day SMAs, underscoring a still-bullish backdrop. Price holds above the 50-, 100-, and 200-day SMAs but sits just under the 20-day SMA, signaling a shallow pullback within the broader uptrend. The 20-day SMA currently stands at 1.3457, acting as immediate dynamic resistance. The Relative Strength Index (14) prints at 52 (neutral), with momentum easing from recent highs.
The rising trend line from 1.3044 underpins the advance, while a topside break through 1.3507 would strengthen bullish continuation. Measured from the 1.3045 low to the 1.3551 high, the 23.6% retracement at 1.3432 offers first support, with the 38.2% retracement at 1.3358 next. Holding above these could keep buyers in control, while a close below 1.3358 would open a deeper corrective phase.
(The technical analysis of this story was written with the help of an AI tool)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
