Pound sterling trades cautiously as stagflation risks mount
GBP/USD declines amid stagflation fears
The British pound (GBP) faces a mixed trading session on Tuesday as investors weigh economic risks ahead of the Bank of England’s (BoE) interest rate decision. Concerns over stagflation—an environment of weak growth and persistent inflation—have added uncertainty to the currency's trajectory.
While the pound remains supported above its 20-day EMA at 1.2390, failure to reclaim the 1.25 level could lead to further downside toward 1.21. On the upside, the next key resistance stands at 1.2607, the December 30 high.
GBP/USD price dynamics (Dec 2024 - Jan 2025) Source: TradingView.
BoE rate cuts expected amid weak labor market
The BoE is set to announce its first policy decision of 2025 on February 6, with markets pricing in a 25-basis-point rate cut, which would bring borrowing costs down to 4.5%. The move comes amid signs of a slowing economy and weakening labor market.
Hiring momentum in the UK private sector has suffered since Chancellor Rachel Reeves raised employers’ National Insurance (NI) contributions in the Autumn Budget. The January PMI report revealed employment levels declined for the fourth consecutive month, with firms citing rising costs and weaker business confidence as primary factors.
Stubborn inflation complicates economic outlook
Despite December’s Consumer Price Index (CPI) reading coming in softer than expected, inflation remains a concern. Higher wage growth, elevated energy prices, and increased costs for imported raw materials continue to put upward pressure on prices. Analysts warn that the persistence of inflation, even as labor demand cools, could lead to stagflation—posing a major challenge for policymakers.
Investment bank Morgan Stanley has downgraded its UK GDP growth forecast for 2025 to 0.9% from 1.3%, citing worsening economic indicators.
The pound fell below 1.2450 against the U.S. dollar in Tuesday’s session as risk sentiment deteriorated. The US Dollar Index (DXY) surged to near 108.00, supported by a stronger safe-haven appeal amid concerns over Trump’s tariff policies and uncertainty surrounding the Federal Reserve’s interest rate outlook.
In our previous analysis, we highlighted the pound's resilience above 1.2400, driven by positive UK PMI data and dovish Fed expectations. These factors continue to shape GBP/USD’s near-term trajectory as it navigates resistance and support levels.
