Pound Sterling surge pauses against US Dollar on upbeat US private employment data

• The Pound Sterling struggles to extend its upside above the intraday high of 1.2550 against the USD due to the upbeat US ADP Employment data.
• Investors expect the trade war to be limited between the US and China.
• Traders price in a 25 bps interest rate cut by the BoE on Thursday.

The Pound Sterling (GBP) surrenders some gains above 1.2500 against the US Dollar in Wednesday’s North American session but is still 0.2% higher. The GBP/USD pair faces pressure above 1.2500 as the US Dollar discovers some bids after the release of the upbeat United States (US) ADP Employment Change data for January. The ADP reported that the private sector hired 183K workers in January, higher than estimates of 150K and the prior release of 176K, revised significantly higher from 122K.

Upbeat labr demand in the private sector is expected to force the Federal Reserve (Fed) to maintain interest rates at their current levels for longer.

Earlier in the day, the US Dollar was facing pressure after losing its risk-premium as United States (US) President Donald Trump postponed tariffs on Canada and Mexico.

Market participants have interpreted this scenario as President Trump’s negotiation tactic to close better deals with his major trading partners. Trump called for an immediate suspension of 25% tariff orders on his North American peers after they agreed to cooperate on criminal enforcement.

Still, investors are hesitant to go all-in for risky assets as a trade war between two powerhouses, the US and China, is brewing. On Tuesday, China responded swiftly to Trump’s 10% tariffs by imposing levies on various US exports, including farm equipment, some autos, and energy items such as Coal and Liquefied Natural Gas (LNG). 

Daily digest market movers: Pound Sterling declines on BoE dovish bets

• The Pound Sterling underperforms its major peers, except the US Dollar (USD), on Wednesday as investors turn cautious ahead of the Bank of England’s (BoE) monetary policy decision, which will be announced on Thursday.
• The BoE is almost certain to reduce its key borrowing rates by 25 basis points (bps) to 4.50%, with an 8-1 vote split. This would be the third interest rate cut by the BoE in its current policy-easing cycle. Monetary Policy Committee (MPC) member Catherine Mann, who has been an outspoken hawk, is expected to support keeping interest rates steady at 4.75%.
• Traders are confident about the BoE cutting interest rates on Thursday as inflationary pressures in the United Kingdom (UK) decelerated at a faster-than-expected pace in December. Inflation in the services sector – which is closely tracked by BoE officials – grew at a moderate pace of 4.4%, compared to 5% growth in November. Also, a sharp decline in the Retail Sales data for December boosted BoE dovish bets.
• Market participants are also anticipating that the BoE will cut interest rates by 56 bps this year beyond the policy meeting on Thursday.

Technical Analysis: Pound Sterling recovers to near 1.2500

The Pound Sterling extends its winning streak for the third trading day against the US Dollar on Wednesday. The GBP/USD advances to near the 50-day Exponential Moving Average (EMA) around 1.2500.

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sideways trend.

Looking down, the January 13 low of 1.2100 and the October 2023 low of 1.2050 will act as key support zones for the pair. On the upside, the December 30 high of 1.2607 will act as key resistance.