Pound to Dollar Rate Hits 4-Week Best, UK Stagflation Fears to Cap Gains

February 6, 2025 - Written by Frank Davies

STORY LINK Pound to Dollar Rate Hits 4-Week Best, UK Stagflation Fears to Cap Gains

Traders have continued to welcome the postponement of tariffs on Mexico and Canada while the US-China tensions have not disrupted markets at this stage.

US yields have declined, and significant dollar losses have occurred.

In this environment, the Pound to Dollar (GBP/USD) exchange rate has strengthened to 4-week highs at 1.2530 before settling around 1.2515.

Scotiabank commented, “Sterling’s technical position looks potentially positive— certainly relative to its peers—but more work needs to be done to bolster upside potential. Near-term gains above 1.25 would add to short-term bull momentum.”

Given UK stagflation fears, GBP/USD is likely to need dollar losses to make further headway.

According to UoB, “given the overbought conditions, a sustained break above 1.2530 appears unlikely.”

Domestically, the final UK PMI services-sector index was revised down to 50.8 from the flash reading of 51.2.

Business confidence dipped to the weakest level since December 2022 while employment declined again.

Excluding the pandemic period, jobs were cut at the fastest rate for 15 years as companies attempted to reduce payroll costs.

Input prices increased at the fastest rate since April 2024 with output charges increasing at the fastest rate for 13 months.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented; "January data highlighted a challenging business environment for UK service providers as stagflation conditions appeared to take a firmer hold at the start of the year.”

He added; "A renewed downturn in new business volumes added to signs that the near-term UK economic outlook remains tilted to the downside.”

Bank of England communication on Thursday will be a crucial element for Pound sentiment.

There is still an important underlying degree of trade and economic uncertainty given US policies.

Danske Bank commented, “The tariff situation remains highly uncertain, and as a result, volatility is likely to persist.”

According to Commerzbank senior FX analyst Antje Praefcke, “Who would seriously want to bet against the dollar’s strength as long as Trump is flexing his muscles on the big stage? The next shock is bound to come, and this will probably be dollar-positive again.”

ING added, “We see a bit more room for the dollar to correct lower on the back of optimism about a US-China deal, but as highlighted above, markets are underestimating alternative scenarios. Anyway, the new layer of uncertainty generated by this tariff scare argues against a sustained dollar decline, in our view.”

If there is a slightly calmer near-term period surrounding trade wars, economic data releases and central bank expectations will have an important impact.

On Tuesday, the US JOLTS data recorded a sharp decline in job openings to 7.60mn for December after a revised 8.16mn the previous month and below consensus forecasts of 8.00mn.

Danske Bank commented, “This could serve as a dovish signal for the Fed, suggesting the economy is not overheating and may face reduced inflationary pressures.”

The ADP data on private payrolls will be released on Wednesday ahead of the key employment report on Friday.

Consensus forecasts are for an increase in non-farm payrolls of around 170,000 from 256,000 the previous month with the unemployment rate holding at 4.1%.

MUFG noted that the payroll survey was conducted during a cold week which may cut employment numbers.

The BLS will also release annual revisions with the risk of a sharp downward revision which would increase reservations over the jobs market.

Weak data would be likely to trigger further dollar selling.

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TAGS: Pound Dollar Forecasts