- At the end of last week's trading, the British pound declined against the US dollar to the support level of 1.2910, after gains in the same week reached the resistance level of 1.2988, the highest for the pair in more than four months.
- The pound's losses came after the UK's GDP reading for January was -0.1%.
- According to economic calendar data results, British economic output fell from 0.4% in December to -0.1% in January, according to new data from the Office for National Statistics, disappointing market expectations of 0.1% growth.
Overall, over the three months to January 2025, UK GDP rose by 0.2%, largely driven by the surprisingly strong performance in December. The UK's services sector, the largest in the economy, grew by just 0.1% in January 2025, following a 0.4% increase in December 2024. According to economists, "This is where the recession begins." "The services sector has slowed significantly, particularly in sectors such as accommodation and food services, which are expected to be severely impacted by the rise in the living wage and employers' National Insurance contributions in April."
January's weakness was concentrated in output, which fell by 0.9% in January 2025, reversing a 0.5% increase in December 2024. Manufacturing output fell by 1.1%, mainly due to declines in the production of base metals (-3.3%) and pharmaceuticals (-3.1%). Mining and quarrying output fell by 3.3%, mainly due to a 3.7% decline in crude oil and natural gas production.
UK construction sector output was also disappointing, falling by 0.2% in January 2025, the same as in December. The data may not be weak enough to alter the course of this week's Bank of England interest rate decision, which is expected to leave rates unchanged. Consequently, we expect the pound to weaken relatively slightly.
Top Forex Brokers
Impact of the data on Bank of England policy
In general, the 0.1% GDP contraction exacerbates the growing pressure on the Bank of England to cut the base interest rate. However, it is unlikely to be sufficient to trigger an immediate interest rate cut this week. Inflation remains the main concern, and the British central bank will want to see sustained progress before taking any action. However, this recent economic weakness may change expectations for an interest rate cut in the summer.
At the same time, the UK GDP figures will disappoint Chancellor Rachel Reeves, who desperately needs a growth rebound to maintain fiscal stability. Reeves is expected to announce spending cuts during this week's spending review, as faltering growth and rising debt costs exacerbate the fiscal deficit.
Spending cuts and impending tax increases in April will also weigh on growth, pointing to another year of economic stagnation. Employer taxes and the minimum wage increase in April will further pressure British businesses. The Labour government is also imposing stricter employment regulations, making hiring tougher and less attractive to employers.
Trading Tips:
The pound against the US dollar is facing important events led by the announcement of central bank policies, so be cautious of the reaction.
Will the GBP/USD cross the 1.30 barrier?
According to Forex market experts' expectations, the GBP/USD pair may have difficulty breaking the 1.30 level. The pace of the pound's rise against the US dollar has slowed, but this seems temporary now. According to licensed trading companies' platforms, the GBP/USD exchange rate rose to a four-month high of 1.2988 last week.
A weak UK GDP reading (-0.1% month-on-month in January) provides a key explanation for this decline. According to currency experts, the pound retreated after the data revealed a contraction in the UK economy. Therefore, the pound is poised for another week of gains against the US dollar, but it has not yet breached the crucial $1.30 level.
Technical Analysis for the GBP/USD pair today:
On the technical side, the GBP/USD daily chart shows that the recent rise coincided with overbought conditions that called for a decline or stabilization, and in this regard, the correction is justified. Meanwhile, the 1.30 level will prove to be a prominent psychological and chart resistance point. According to currency forecasts, the rise of GBP/USD above 1.30 may be an exaggerated step if the challenges facing the British economy emerge again.
Overall, the 1.30 level remains a key resistance level for the GBP/USD pair, while on the downside, support is at 1.25.
In general, the rise of the GBP/USD pair is largely due to a comprehensive reassessment of US economic expectations, which deteriorated during the first weeks of President Trump's term. Political uncertainty and job cuts are weighing on confidence, and this translates into weakness in economic surveys.
As long as the "US exceptionalism" trade continues to unwind, GBP/USD weakness may be limited.
According to currency experts at Société Générale: "The GBP/USD pair broke through support last month, triggering an extended rebound. It appears poised to gradually head towards the November highs of 1.3045 and 1.3150/1.3175. The bottom of the recent pivot at 1.2550 represents near-term support."
According to currency experts at Scotiabank: "Trends remain supportive for GBP on short- and medium-term charts, and GBP is expected to find support on minor dips ahead of support at 1.2910. Resistance at 1.30 is expected before a rally to 1.3125/50."
Overall, the GBP is experiencing an eventful week ahead, with Bank of England data, the Spending Review, and inflation data. Therefore, we expect the British pound to move independently based on different outcomes.
Ready to trade the Forex GBP/USD analysis and predictions? Here are the best forex trading platforms UK to choose from