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Sterling’s Rally Stalls: Unraveling the GBP/USD’s Decline Amid Mixed US Economic Data

In a surprising twist, the GBP/USD pair has seen a pause in its recent upward trajectory, settling near 1.2710. This shift comes amidst a backdrop of mixed economic signals from the United States, reshaping the market landscape.

Key Points:
📉 GBP/USD Break: Snapping its winning streak against a strengthening US Dollar.
📊 Economic Data Duality: US labor market shows strength, but services sector slows.
🏦 Central Bank Dilemma: UK’s economic outlook puts Bank of England in a tight spot.

The GBP/USD halted its upward movement, which began last Wednesday, trading around 1.2710 during Monday’s Asian session. Despite this, the Pound Sterling (GBP) previously gained momentum against the US Dollar (USD) due to improved risk appetite, spurred by recent mixed economic data from the United States.

The US Dollar Index (DXY) remains relatively steady near 102.40, although it leans towards a negative bias. This sentiment is partly influenced by a decrease in the 2-year US Treasury bond yield, which is currently trading lower at 4.38%.

Friday’s session for the US Dollar was marked by volatility, oscillating between gains and losses in response to mixed economic data. The US Bureau of Labor Statistics reported a notable rise in Nonfarm Payrolls (NFP), reaching 216K in December, which not only exceeded the previous figure of 173K but also surpassed market expectations of 170K. This positive development in the job market, however, was contrasted by a slowdown in the services sector. The Institute for Supply Management (ISM) reported the Services PMI for December at 50.6, below the forecasted 52.6 and the previous month’s 52.7.

GBP/USD Daily Chart

These mixed signals were further echoed by Thomas Barkin, President of the Federal Reserve Bank of Richmond, who noted a consistent softening in the US labor market, with a reacceleration appearing unlikely. Similarly, Lorie Logan, President of the Federal Reserve Bank of Dallas, suggested the possibility of a rate hike, emphasizing the need to avoid premature easing in monetary policy.

On the UK front, recent positive economic indicators have supported the GBP’s strength. November’s UK Consumer Credit data showed a rise in borrowing, and the S&P Global/CIPS Composite PMI for December indicated an uptick in the Services sector.

However, the GBP faces potential selling pressure amid a gloomy economic outlook. Investors are closely watching the Bank of England (BoE) as it navigates between recession risks and high inflation. The UK’s corporate sector is increasingly calling for rate cuts to support the economy, a sentiment echoed in the Institute of Directors Economic Confidence Index survey, which revealed a decline in optimism among British directors.

Looking ahead, market participants are poised to focus on upcoming UK economic releases, including the British Retail Consortium (BRC) Like-For-Like Retail Sales and Manufacturing Production, to gauge the UK’s economic health and the potential trajectory of the GBP/USD.