22.01.202600:44 Forex Analysis & Reviews: GBP/USD. The pound follows the greenback

The pound against the dollar cannot determine the direction of its movement. On Tuesday, the GBP/USD pair approached the 1.35 level, while on Wednesday, it tested the 1.33 area. The pound is following the greenback, which in turn is reacting to a rapidly changing information backdrop.

In the spotlight is Donald Trump, who arrived in Davos on Wednesday for the World Economic Forum. He has already delivered a speech at the forum and will later meet with leaders of European countries and representatives of big business.

By the end of Wednesday, it will become clear in what vein further events will develop. Will the US president back away from his belligerent intentions to establish control over Greenland? Or will he insist on his position despite the existing risks (including for the US economy)? This is the main intrigue of Davos, the resolution of which will determine the direction of the dollar and, accordingly, the GBP/USD pair.

Notably, the British currency consistently ignores its "own" fundamental factors. On Tuesday, the pound ignored the UK labour market report, and on Wednesday, it ignored the inflation report. Moreover, traders are disregarding both positive and negative signals for the pound.

For example, Tuesday's release reflected a continued cooling of the UK labour market: the unemployment rate remained at 5.1% (the highest value of the indicator since early 2021), employment decreased by 43,000 (the most significant fall since the end of 2020), and the number of jobseeker's allowance claims rose by 17.9k, after a 3k decline the previous month. In addition, UK wage growth slowed — both overall (to 4.7%) and excluding bonuses (to 4.5%).

In other words, all the indicators are not in the pound's favor. Yet the GBP/USD pair on Tuesday set a new weekly high at 1.3490. A weak dollar allowed buyers of the pair to strengthen their positions, despite the deteriorating UK labour market.

On Wednesday, a mirror situation developed. Despite the acceleration in UK inflation, the pair fell sharply, hitting an intraday low at 1.3400.

The thing is that the UK reports are "delayed-action releases" in this case. They will be remembered and will remind us of themselves again — in two weeks, when the next Bank of England meeting takes place. Therefore, UK data should not be ignored — as soon as geopolitics moves to the background, the "classic" fundamental factors will again come to the fore.

So, according to the published data, the headline consumer price index on a monthly basis climbed out of negative territory (-0.2%) and rose in December to 0.4%. Year-on-year, the indicator also accelerated after a two-month decline, to 3.4% (forecast 3.3%). Core CPI, excluding energy and food prices, remained in December at the November level, i.e., at 3.2%.

The retail prices index (RPI), which employers use when discussing the "wage issue," also rose significantly. On a monthly basis, it jumped to 0.7% (forecast 0.5%), hitting an eight-month high, and year-on-year to 4.2%, after a fall to 3.8% in November. This component of the report accelerated for the first time after a prolonged four-month decline.

The report's structure indicates that the main drivers of the December rise in overall inflation were higher prices for alcohol and tobacco, transport (especially air travel), and food.

Such a result allows the Bank of England to maintain a wait-and-see stance — at least in the context of the February meeting. In the context of accelerating headline CPI and RPI, the weak UK labour market will remain in the shadows.

Wednesday's report is on the British currency's side. But against the dollar, the pound on Wednesday is completely dependent on the greenback's condition. Donald Trump continues to voice bellicose statements, blaming Europe for everything and insisting on his territorial claims. Against this backdrop, the GBP/USD pair rose again after falling to the base of the 1.34 figure.

But ahead is Trump's meeting with leaders of key European countries, after which the US president may soften his rhetoric. This is unlikely, but not impossible. In that case, sellers would again seize the initiative in the GBP/USD pair.

The informational background is changing at kaleidoscopic speed, so at the moment it makes sense to take a wait-and-see position on the pair. On Wednesday, the pair is being driven not by macroeconomic reports but by Trump, who is, by definition, unpredictable.