Pound Sterling gives up its intraday recovery driven by positive UK labor market data

The Pound Sterling (GBP) gives up its earlier recovery driven by strong UK labor market data, as it faces renewed pressure following comments from Bank of England (BoE) Governor Andrew Bailey. During an event in Brussels on Tuesday, Bailey expressed concerns over a "weak growth environment" in the UK and highlighted the "heightened uncertainty" that remains.

In an interview on Monday, Bailey stated that despite the unexpectedly positive Q4 Gross Domestic Product (GDP) data, the broader economic outlook remains sluggish. As a result, the BoE has lowered its growth forecast for the year to just 0.75%.

Bailey's remarks came after the release of the UK employment data, which initially saw the Pound recover. The Office for National Statistics (ONS) reported a notable increase of 107K jobs in the three months ending December, well above the 35K seen in the September-November period. The ILO unemployment rate remained steady at 4.4%, contrary to expectations of a rise to 4.5%. Despite the positive employment data, business owners were concerned about the upcoming increase in employer contributions to National Insurance (NI) as announced by Chancellor Rachel Reeves in the Autumn Budget, set to take effect in April.

In addition to strong employment figures, wage growth accelerated, with Average Earnings excluding bonuses rising to 5.9%, up from 5.6%, and Average Earnings including bonuses climbing by 6%, surpassing both estimates and prior figures. The high wage growth may fuel inflation expectations, prompting the BoE to maintain interest rates at 4.5%.

Bailey, however, noted some softness in the labor market, stating that while the latest employment data was in line with expectations, wage growth had been less than anticipated. As investors await the release of the UK Consumer Price Index (CPI) data for January on Wednesday, the Pound's trajectory remains uncertain, with attention on how inflationary trends may influence the BoE's future decisions.

Daily Digest Market Movers: Pound Sterling Weakens Against US Dollar, FOMC Minutes in Focus

• The Pound Sterling is down more than 0.2%, trading near 1.2590 against the US Dollar (USD) in Tuesday's European session. GBP/USD declined as the US Dollar rebounded, with the US Dollar Index (DXY) recovering to near 107.00 from a two-month low of 106.50 posted on Friday.
• The Greenback strengthens as investors anticipate persistent inflationary pressures from US President Donald Trump's economic policies, including 25% tariffs on steel and aluminum imports and 10% tariffs on China. However, Trump's reciprocal tariff plan is delayed and is unlikely to take effect before April, with Commerce Secretary nominee Howard Lutnick stating the President will act on tariffs by April 1.
• Expectations that the Federal Reserve (Fed) will maintain current interest rates for a longer period also support the US Dollar. Fed Governor Michelle Bowman said the benchmark rate "is now in a good place" and emphasized patience while monitoring inflation data.
• Investors are awaiting the Federal Open Market Committee (FOMC) minutes from January's meeting, set for release on Wednesday, which could provide insights into how long the Fed plans to maintain rates at 4.25%-4.50%.

Technical Analysis: Pound Sterling Struggles to Hold Above 1.2600

The Pound Sterling faces difficulty maintaining its position above the critical 1.2600 level against the US Dollar during Tuesday's European session. The near-term outlook for GBP/USD is still bullish as it remains above the 50-day Exponential Moving Average (EMA), which is around 1.2500.

The 14-day Relative Strength Index (RSI) holds above 60.00, signaling potential for continued bullish momentum if the RSI stays above that level.

Key support is seen at the February 3 low of 1.2250, while the December 6 high of 1.2810 represents key resistance for the pair.