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Pound Sterling is seeing a softer trend emerge and a retreat to 1.2250 is a possibility for the coming week.
The Pound-to-Dollar exchange rate (GBPUSD) dropped below the nine-day and 21-day exponential moving averages (EMA) last Friday, signalling a short-term trend turn that opens the door to 1.2250.
GBPUSD dipped below the EMA at 1.2429 following the release of some robust U.S. job data that reinforced a notion the Federal Reserve will be unable to cut interest rates again until the second half of the year, shoring up the Dollar's support via the interest rate channel.
The Relative Strength Index (RSI) is below 50 and is pointing lower, which is another sign that momentum is beginning to favour the Dollar again and a recovery sequence that began one month ago has run out of steam.
Notably, GBPUSD rose up to meet the 50-day EMA last week, but the advance failed here, denying the exchange rate a chance to break into a new range that lies above 1.2486 and establish a more durable recovery.
Ultimately, then, the medium-term downtrend is intact and at threat of resuming.
Weekend news of new U.S. import tariffs caused the Dollar to jump in early Asian trade and underscores the softer outlook for GBPUSD that we see etched into the charts.
Above: GBPUSD at daily intervals.
U.S. President Donald Trump said at the weekend he will impose a 25% tariff on all steel and aluminium imports coming into the U.S., starting on Monday, while a further series of tariffs were likely to be announced later in the week.
"Trump announced his latest tariffs late on Sunday, which suggests that he is not too worried about the market reaction. Typically, Trump has announced tariffs earlier in the weekend, as if he was watching the reaction and to give himself time to back track before stocks or risk assets sold off too sharply. This may suggest that Trump is determined to impose tariffs on these industrial metals. These tariffs are targeting specific products, rather than individual countries, which makes it hard for any negotiations to take place," says Kathleen Brooks, research director at XTB.
The threat of tariffs has been a key concern for major markets and a source of support for the U.S. Dollar.
Trump added that later in the week, he would announce a series of reciprocal tariffs targeting the imports from a wide range of countries that impose imports on U.S. exports. "Very simply, if they charge us, we charge them," he said.
The developments are a continuation of Trump's aggressive stance on global trade. Last week, he came within hours of setting 25% tariffs on Canada and Mexico, only to offer them a 30-day reprieve. A 10% import tariff on Chinese goods proceeded.
"Treasury yields rose on inflation concerns and markets reduced the odds of seeing a second rate cut by the Fed this year. USD gained across the board as well," says Thanim Islan, an analyst at Equals Money.
With uncertainty clouding the horizon, it's hard to see the Pound making much headway against the Dollar.
The week ahead is busy, with the highlight being Wednesday's U.S. inflation data. The expectation is for a headline print of 0.3% month-on-month that takes the annual rate to 2.9%, and for core inflation to come in at 0.3% m/m.
Above: The U.S. labour market remains robust, with recent trends showing a pick-up in job creation.
Anything above this will likely give the Dollar some legs and press GBPUSD below 1.23. An undershoot would weigh on the Dollar as it stabilises 'hawkish' interest rate expectations and raises hopes for more than one cut from the Fed this year.
Keep an eye on Fed Chair Jerome Powell's comments to lawmakers on Tuesday and Wednesday. We know he is keen to pause the rate hiking cycle amidst policy uncertainty, but his response to any questions relating to tariffs could be important in setting out how the Fed will approach the matter.
UK-based risks to Pound Sterling would be Thursday's GDP release, and the expectation is the economy shrank 0.1% in the fourth quarter of the year, following on from the third quarter's 0% growth.
The economy has flatlined since the new government took office, and yet inflation is rising, creating a stagflationary backdrop, which is never good for a currency.
The Bank of England acknowledged this last week when they cut interest rates by 25 basis points and committed to further cuts, resulting in GBP weakness.
With the decision fresh in mind, we have comments from Governor Andrew Bailey to look forward to on Tuesday, and fellow Monetary Policy Committee member Megan Green speaks on Wednesday.
But it's MPC member Catherine Mann, who shocked observers by voting for a 50 basis point cut last week, who will attract the most attention. She speaks on Tuesday and will explain why she has dramatically changed tack for someone who been a staunch monetary hawk to a fully fledged dove. Her thinking behind the switch will be intriguing.
Will Bailey, Mann and Green shift the dial for the Pound? No, and we would look for any reactions in GBPUSD to fade.
The Federal Reserve is on hold, the Bank of England is set to cut more, creating a central bank policy divergence that is naturally skewed to GBPUSD weakness.