GBP/USD found buying on Monday, rising 0.7%. PMIs were weak on both sides of the Atlantic. Easing dollar flows gave the pound a reprieve. GBP/USD rose for a second day in a row, gaining 0.7% to start the new trading week and dragging the pair back above the 1.2500 mark after a bearish retest below 1.2400 last week. Purchasing Managers' Indexes (PMIs) in both the UK and the US missed targets. However, the overall environment of rising risk appetite curbed safe-haven flows into the dollar.
UK PMIs for December completely missed targets, falling below Wall Street forecasts and retreating, but still above the 50.0 boom-bust dividing line. In particular, the composite PMI fell to 50.4 from an expected 50.5, falling to a 13-month low.
The final S&P Global PMI was slightly off on Monday, with both the Composite and Services PMI climbing month-on-month in December, but falling short of analyst expectations. Both indicators were slightly down from initial readings, but still up as the U.S. economy continues to develop.
The key data for the week is the U.S. ISM Services PMI for December, due on Tuesday. The median market forecast is for a rise to 53.0 from 52.1 last month. Friday's Non-Farm Payrolls (NFP) report will cast a long shadow on the market this week, as investors expect the report to help push the Federal Reserve (FED) to take more interest rate cuts, but not too weak or too strong.
GBP/USD has inched into a two-day rally, a welcome technical turnaround after the pair fell to a fresh nine-month low below the 1.2400 mark last week. While selling pressure remains focused on the key 1.2000 price level, exhaustion could be in sight as buyers attempt to rally prices back towards the 50-day exponential moving average (EMA) at the 1.2700 mark that was breached.
GBP/USD Daily Chart
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. According to 2022 data, it is the fourth most traded foreign exchange unit in the world, accounting for 12% of all transactions, an average of $630 billion per day. Its main trading pairs are GBP/USD, also known as "Cable", which accounts for 11% of foreign exchange, GBP/JPY, or "Dragon" as traders call it (3%), and EUR/GBP (2%). The pound is issued by the Bank of England (BoE).
"The single most important factor affecting the value of the pound is the monetary policy decided by the Bank of England. The Bank of England's decisions are based on whether it has achieved its primary goal of "price stability" - a stable inflation rate of around 2%. The main tool to achieve this goal is to adjust interest rates. When inflation is too high, the Bank of England will try to control it by raising interest rates, which makes it more expensive for individuals and businesses to get credit. This is generally good for the pound because higher interest rates make the UK a more attractive place to invest for global investors. When inflation falls too low, it is a sign of slowing economic growth. In this case, the Bank of England will consider lowering interest rates to make credit cheaper so that businesses will borrow more money and invest in projects that promote growth."
"The data released can measure the health of the economy and can affect the value of the pound. Indicators such as GDP, manufacturing and services PMIs, and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only will this attract more foreign investment, it may also encourage the Bank of England to raise interest rates, which will directly push the pound higher. Otherwise, if the economic data is weak, the pound may fall."
"Another important data for the pound is the trade balance. This indicator measures the difference between a country's export revenue and import expenditure over a certain period of time. If a country produces very popular export products, its currency will benefit purely from the additional demand created by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance will strengthen the currency and vice versa."