The Pound Sterling (GBP) has surrendered its intraday gains and turned negative against the US Dollar (USD) in Tuesday’s North American session, with the GBP/USD pair retreating to around 1.2160. Despite the US Producer Price Index (PPI) report showing slower-than-expected growth in producer inflation for December, the broader outlook for the US Dollar (USD) remains strong due to firm expectations that the Federal Reserve (Fed) will minimize interest rate cuts this year.
The annual headline PPI showed a 3.3% rise, slightly above the November reading of 3.0%, but lower than the market estimate of 3.4%. The core PPI, which excludes food and energy items, grew by 3.5%, slightly faster than the 3.4% in November but missing expectations for a 3.8% rise. Month-on-month, the headline PPI rose by 0.2%, while the core PPI remained flat.
Despite the PPI miss, the market’s outlook for the US Dollar remains positive, with strategists at Barclays reducing their expectations for the number of Fed rate cuts in 2025. The bank now anticipates only one rate cut this year, down from two previously, after stronger-than-expected US labor market data and persistent inflationary pressures.
Investors are now awaiting the US Consumer Price Index (CPI) data for December, which is expected to show a slight acceleration in headline inflation to 2.8% from 2.7% in November, with core inflation steady at 3.3%. A strong CPI print could reinforce expectations of limited rate cuts by the Fed in 2025.
UK Economic Woes Weigh on GBP
The GBP’s weakness is also tied to rising yields on UK government gilts. The 30-year UK gilt yields have surged to 5.47%, the highest level since 1998, driven by multiple factors such as uncertainty over trade policies under President-elect Donald Trump’s administration, persistent inflation, and slower growth expectations in the UK. As borrowing costs rise, investors expect the UK government to increasingly turn to foreign financing to fund day-to-day spending, heightening concerns about the UK’s economic outlook.
The increase in UK gilt yields puts pressure on UK Chancellor of the Exchequer Rachel Reeves, who faces criticism for raising employer contributions to National Insurance (NI) and leaving little fiscal room to maneuver. Additionally, market participants are looking ahead to the UK’s Consumer Price Index (CPI) data for December, due on Wednesday. This data will be crucial for shaping market expectations around the Bank of England’s (BoE) likely interest rate actions.
Analysts at UBS expect the BoE to cut rates in February, with more cuts anticipated later in the year, as inflationary pressures in the UK are seen to be fading. The Swiss bank anticipates that tightening financial conditions in the real economy will lead to these rate cuts.
Technical Outlook: GBP/USD Remains Bearish
From a technical standpoint, the GBP/USD pair’s outlook remains bearish. The 20-day Exponential Moving Average (EMA) is firmly declining near 1.2430, highlighting the overall downtrend. The 14-day Relative Strength Index (RSI) has recently rebounded after reaching oversold levels below 30, but the broader trend remains negative until the RSI recovers within the 20.00-40.00 range.
Looking ahead, the pair is expected to find support near the October 2023 low of 1.2050. On the upside, the 20-day EMA will act as key resistance, with the pair likely to struggle against the downward trend until it manages to break through this level.
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