The Pound Sterling (GBP) faces pressure against its major peers in Tuesday's North American session. The British currency trades cautiously despite United Kingdom (UK) Prime Minister Keir Starmer's positive commentary on the economic outlook in an interview with Bloomberg on Tuesday. Starmer said that the number one priority of the Labour government is "growth" and the economy is starting to "turn around." On the outlook of trade relations with the United States (US), Starmer commented: "We've got a huge amount of trade between our two countries already and the base is there for even better trading relations. We need to build on that."
Starmer's positive comments have fuelled some strength in the Pound Sterling, which was trading cautiously amid worries that the economy could face risks of stagflation amid weakening labor demand and a stubborn inflation outlook.
The hiring momentum in the UK private sector has been hit hard since Chancellor of the Exchequer Rachel Reeves raised employers' contribution to National Insurance (NI) in the Autumn Budget. The preliminary S&P Global Purchasing Managers Index (PMI) report for January showed that employment levels have decreased for the fourth month running, which businesses often linked to rising cost pressures. The agency added that many firms suggested that the forthcoming hike in "employers' NI" contribution had resulted in "cutbacks to recruitment plans", while others cited the impact of a post-Budget slump in business confidence.
Though the UK Consumer Price Index (CPI) for December came in softer than expectations and November's reading, it is expected to remain broadly sticky as private firms pass on the impact of higher wage growth, energy prices, and prices paid for imported raw materials to consumers. The inflation rate was the steepest for just over one-and-a-half years in both the manufacturing and services sectors, S&P Global reported.
Weak employment and higher inflation are expected to lead to stagflation in the UK economy. This will pose a bigger risk for the Bank of England (BoE), which is scheduled to announce its first monetary policy decision of 2025 on February 6. Traders are pricing in a 25 basis point (bps) interest rate reduction, pushing borrowing rates to 4.5% amid the weak economic outlook.
Investment banking firm Morgan Stanley has revised its forecast for the UK's Gross Domestic Product (GDP) growth lower to 0.9% for the year from 1.3%, citing signs of a slowdown in labor demand and faltered economic prospects.
The Pound Sterling is down below 1.2450 against the US Dollar in Tuesday's European session after failing to break above the psychological resistance of 1.2500. The GBP/USD falls sharply as the safe-haven appeal of the US Dollar has increased amid a dismal market mood.(Cay) Newsmaker23
Source: fxstreet
