The GBP/USD pair is gaining momentum to around 1.3400 during the early Asian session on Monday. The US dollar (USD) weakens against the British pound (GBP) amid US President Donald Trump’s recent threats to impose tariffs against Europe over Greenland. US markets are closed for the Martin Luther King Jr. Day holiday on Monday.
Reuters reported on Saturday that it would impose an additional 10% import tariff starting February 1 on goods coming from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland and the United Kingdom until the United States is allowed to buy Greenland.
European Union ambassadors reached a broad agreement on Sunday to step up efforts to dissuade Trump from imposing tariffs on European allies, while France proposes to respond with a range of previously untested economic countermeasures. The US dollar faces some selling pressure after this headline as traders evaluate the long-term implications of Trump’s latest move on the currency’s standing.
“While you might argue that tariffs threaten Europe, it is actually the dollar that is bearing the brunt of it, because I think markets are pricing in higher political risk premiums on the US dollar,” said Khun Goh, head of Asia research at ANZ Bank.
Traders will be closely monitoring the UK Employment and Consumer Price Index data, which will be released later this week. These reports could provide some hints about the Bank of England’s monetary policy outlook. In the event of weaker than expected results, this could drag down the pound against the US dollar in the near term.
Frequently asked questions about the pound sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most popular foreign exchange (FX) trading unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to data for 2022. The main trading pairs are GBP/USD, also known as “Cable”, which accounts for 11% of FX, GBP/JPY, or “Dragon” as traders know it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary objective of “price stability” – a stable inflation rate of around 2%. The primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it more expensive for individuals and businesses to obtain credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to reduce the cost of credit so that companies borrow more to invest in growth-generating projects.
Data releases measure the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing PMIs, services and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the British pound is likely to fall.
Another important data release for the British Pound is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly sought-after exports, its currency will take full advantage of the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
