GBP/USD Dips to Around 1.2710 Following Recent Rises Amid Better Risk Sentiment

The British pound (GBP) retreated slightly to 1.2710 against the US dollar (USD) after recent gains bolstered by an improved risk appetite, halting its winning streak from Wednesday. This shift comes amidst mixed economic signals from the United States, affecting the USD’s performance and Treasury bond yields.

The US Dollar Index (DXY) fluctuated around 102.40, exhibiting a slight negative bias. This trend is likely influenced by a decrease in short-term US Treasury yields, with the 2-year bond’s yield dropping to 4.38%.

On Friday, the US dollar saw volatile trading driven by mixed economic reports. Employment figures were a bright spot, with Nonfarm Payrolls for December rising to 216K—outperforming both the anticipated 170K and the previous 173K. Yet, the Institute for Supply Management (ISM) reported a deceleration in the services sector, with the Services PMI falling to 50.6, below both the expected 52.6 and the prior 52.7 reading.

Thomas Barkin, President of the Federal Reserve Bank of Richmond, noted a consistent softening in the US labor market, suggesting a rebound is unlikely. Meanwhile, Lorie Logan, President of the Federal Reserve Bank of Dallas, highlighted the need for caution in monetary policy, implying that rate hikes shouldn’t be hastily discounted despite recent financial easing.

In the UK, positive economic indicators have bolstered the pound. Improvements in Consumer Credit and a rise in the Services PMI indicated by the S&P Global/CIPS Composite PMI for December suggest a healthier economic condition.

However, the GBP faces downward pressure amid a bleak economic outlook. The Bank of England (BoE) is caught between high inflation and looming recession risks. Corporate leaders in the UK are pressing the BoE for swift interest rate cuts to aid the faltering economy, a sentiment echoed by the Institute of Directors Economic Confidence Index, which noted a decline in optimism among business leaders.

Investors are now looking ahead to the British Retail Consortium (BRC) Like-For-Like Retail Sales data due Tuesday and Manufacturing Production figures on Friday for further insights into the UK’s economic trajectory.