GBP/USD Weekly Outlook: Pound Sterling slides to multi-month lows amid inflation concerns
- The Pound Sterling returns to the red against the US Dollar, hitting 14-month lows.
- GBP/USD licks wounds heading into the UK/US inflation showdown.
- Pound Sterling remains vulnerable below the key 21-day SMA at 1.2530.
The Pound Sterling (GBP) resumed its bearish momentum against the US Dollar (USD), pushing GBP/USD to the lowest level in 14 months below 1.2200.
Pound Sterling kept falling
Nothing could stop Pound Sterling sellers as the GBP/USD pair faced a double whammy in the first full week of 2025. The week began on an upbeat note as risk appetite returned on China’s stimulus optimism and strong Caixin Services PMI data. The People’s Bank of China (PBOC) pledged over the weekend that it will step up financial support for technology innovation and consumption stimulation as part of a continued effort to boost economic growth, per Bloomberg.
Positive risk sentiment weighed on the safe-haven USD, while helping the higher-yielding British Pound extend its previous week’s late rebound. However, the tide turned against the pair as inflation fears resurfaced on increased concerns over the potential impact of US President-elect Donald Trump’s immigration and trade policies, reviving the safe-haven demand for the US Dollar.
Expectations of fewer interest rate cuts by the US Federal Reserve (Fed) this year, fanned by encouraging US Job Openings and Labor Turnover Survey and ISM Manufacturing and Services PMI data, drove US Treasury bond yields higher across the curve, adding to the upside in the Greenback.
The decline in the GBP/USD pair gathered traction midweek after the Pound Sterling came under intense pressure due to a sharp sell-off in the British government bond market, fuelled by investors’ anxiety about UK assets and the economic outlook.
The bond market rout extended on Thursday, with the yield on benchmark 10-year UK Gilts rising by as much as 0.12 percentage points to 4.921%, the highest since 2008. This smashed the pair to its lowest level since November 2023 at 1.2239 before it recovered some ground to near 1.2300.
GBP/USD licked its wound near multi-month troughs heading into Friday’s US Nonfarm Payrolls (NFP) data release. Investors remained wary of the sell-off in the global bond market and growing Chinese economic worries.
In the American session on Friday, the USD gathered strength against its rivals after the December jobs report showed that NFP rose by 256,000, beating the market expectation of 160,000 by a wide margin. Additionally, the Unemployment Rate edged lower to 4.1%, while the Labor Force Participation Rate remained unchanged at 62.5%. Pressured by the USD rally, GBP/USD declined sharply with the immediate reaction and declined below 1.2200.
Inflation data remain the central focus
After a week dominated by US economic events, attention also turns to the UK macro data amid a quiet start to a busy week.
The early part of the week lacks any top-tier UK data releases but the Producer Price Index (PPI) data from the US will grab some eyeballs on Tuesday.
The high-impact Consumer Price Index (CPI) inflation data from both sides of the Atlantic will stand out on Wednesday.
The UK monthly Gross Domestic Product (GDP) report and Industrial Production will be published on Thursday ahead of the US Retail Sales and Jobless Claims data.
Friday will feature the Chinese fourth-quarter GDP and December activity data, which could significantly impact risk sentiment and higher-yielding assets such as the British Pound.
The UK Retail Sales and the mid-tier US housing data will be published on the same day.
Apart from the data publication and speeches from Fed policymakers, Trump's policy speculations and geopolitical developments will also emerge as potential market drivers.
GBP/USD: Technical Outlook
GBP/USD confirmed a downside break from the six-week-long falling wedge formation after closing Thursday below the lower boundary of the wedge at 1.2330.
The 14-day Relative Strength Index (RSI) languishes in negative territory near 30, indicating more scope for the downside.
Further, the 50-day Simple Moving Average (SMA) and the 200-day SMA Death Cross, confirmed last month, remains in play and acts as a headwind to the pair.
If sellers flex their muscles and keep the pair below the previous 14-month low of 1.2239, the next downside target is November 10 2023 low of 1.2187.
Further south, the 1.2100 demand area could offer some respite to buyers. If that support caves in, the 1.2050 psychological level will be tested.
Conversely, any recovery will need acceptance above 1.2511 to sustain. That level is the confluence of the 21-day SMA and the upper boundary of the wedge.
The pair will then challenge the 50-day SMA at 1.2639 toward the 200-day SMA at 1.2803.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
