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The Pound Sterling (GBP) faced renewed pressure against the US Dollar (USD) this week, with GBP/USD dipping but managing to cling above the crucial 1.2900 psychological level. This precarious balance reflects a confluence of economic uncertainties, both in the UK and the US, that are keeping traders on edge.
A key factor weighing on the Pound was the unexpected contraction of the UK economy in January. Official data revealed a 0.1% decline in Gross Domestic Product (GDP), a stark contrast to analysts’ expectations of a 0.1% expansion. This disappointing figure has fueled speculation that the Bank of England (BoE) might be forced to consider earlier rate cuts, with interest rate swaps now pricing in a significant easing of monetary policy by 2025.
Meanwhile, across the Atlantic, rising US inflation expectations are complicating the Federal Reserve’s (Fed) path. The University of Michigan’s latest consumer sentiment survey revealed a sharp deterioration in confidence, coupled with a surge in inflation expectations. Americans are now bracing for higher prices in the coming year, and long-term inflation outlooks have also risen. This data, coupled with Fed Chair Jerome Powell’s recent comments highlighting the impact of tariffs on inflation expectations, has raised concerns that the Fed may be unable to ease policy as anticipated, especially with President Trump’s planned tariff implementation on April 2nd. The potential impact of rising Producer Price Index (PPI) is also a factor, with higher producer prices often leading to higher consumer prices.
Looking ahead, traders are bracing for a busy week of central bank activity. The Fed’s upcoming policy decision and economic projections will be closely scrutinized, particularly in light of the elevated inflation concerns. The BoE will also announce its latest interest rate decision, with markets anticipating a hold amidst the current economic uncertainty. Additionally, key economic data releases, including UK jobs reports, S&P Global Flash PMIs, and US retail sales and housing data, will provide further insights into the health of both economies.
From a technical perspective, GBP/USD has retreated towards the 1.2900 level but has so far managed to hold above it. The pair’s recent break above the 200-day Simple Moving Average (SMA) at 1.2791 suggests underlying bullish momentum. A break above 1.2950 could pave the way for a test of the 1.3000 resistance level. Conversely, a drop below 1.2900 could expose the week’s low of 1.2860, with the 200-day SMA acting as a potential support level. The interplay between UK economic weakness and US inflation fears will continue to drive GBP/USD price action in the coming days.
