Pound Sterling trades cautiously amid mounting UK stagflation fears

The Pound Sterling (GBP) shows mixed performance against its major counterparts on Tuesday, as concerns about the UK economy continue to weigh on market sentiment. Investors remain cautious amid growing fears of stagflation, driven by weak labor demand and persistent inflation.

The UK private sector has seen a significant slowdown in hiring since Chancellor of the Exchequer Rachel Reeves increased employers’ contributions to National Insurance (NI) in the Autumn Budget. The preliminary S&P Global Purchasing Managers Index (PMI) for January revealed a decline in employment levels for the fourth consecutive month, with businesses linking this to rising cost pressures. Many companies have reported that the upcoming increase in employers’ NI contributions has led to recruitment cutbacks, while others pointed to a drop in business confidence following the Budget.

Although the UK Consumer Price Index (CPI) for December was softer than expected and lower than November’s reading, inflation remains stubborn. Private firms are likely to continue passing on higher wage growth, energy prices, and costs of imported raw materials to consumers. S&P Global noted that inflation in both the manufacturing and services sectors was the highest in over 18 months.

Weak employment and persistent inflation are raising concerns of stagflation in the UK economy, which poses a significant challenge for the Bank of England (BoE). The BoE will announce its first monetary policy decision of 2025 on February 6, with traders pricing in a 25 basis point (bps) interest rate cut, bringing borrowing rates to 4.5% amid a bleak economic outlook.

Morgan Stanley has downgraded its UK GDP growth forecast for 2025 to 0.9%, down from 1.3%, citing signs of a slowdown in labor demand and weaker economic prospects.

Daily Market Digest: Pound Sterling Drops Against USD Amid Trump Tariff Concerns and Fed Policy Focus

• The Pound Sterling falls below 1.2450 against the US Dollar (USD) in Tuesday’s European session after failing to break the psychological resistance at 1.2500. The GBP/USD pair drops sharply as the US Dollar’s safe-haven appeal strengthens amid a negative market sentiment.
• The US Dollar Index (DXY), which measures the Greenback’s strength against six major currencies, rises to nearly 108.00 following a sharp sell-off in global power, data center, and chatbot stocks. The decline in global technology stocks stems from concerns that China’s DeepSeek AI model could disrupt the global market by rivaling US chatbots like OpenAI and Meta without relying on high energy demand or advanced semiconductors.
• Growing fears of tariffs from US President Donald Trump, along with uncertainty surrounding the Federal Reserve’s (Fed) monetary policy decision on Wednesday, are boosting demand for the US Dollar.
• US Treasury Secretary Scott Bessent has proposed a 2.5% universal tariff, with plans to increase it by the same amount each month, according to the Financial Times (FT). Market participants view this gradual approach to tariff hikes as more favorable for the US and other countries in negotiations.
• The Fed is expected to announce a pause in its current policy-easing cycle, keeping interest rates unchanged in the 4.25%-4.50% range on Wednesday. However, the Fed’s guidance is anticipated to be slightly hawkish due to persistent inflation concerns and stable labor demand.
  
  

Technical Analysis: Pound Sterling Recedes from 50-day EMA

The Pound Sterling faces selling pressure against the US Dollar on Tuesday after failing to extend its rally above the 50-day Exponential Moving Average (EMA) at around 1.2500. However, the near-term outlook for GBP/USD remains positive as the pair holds above the 20-day EMA, which is positioned around 1.2390.

The 14-day Relative Strength Index (RSI) has risen above 50, moving up from the 20-40 range, indicating that bearish momentum has subsided, at least temporarily.

To the downside, key support levels are found at the January 13 low of 1.2100 and the October 2023 low at 1.2050. On the upside, resistance is seen at the December 30 high of 1.2607.