GBP/USD declines towards 1.2000 as Fed’s higher interest rate concerns strengthen

The GBP/USD pair displays a sideways action around 1.2050 in the early Asian session. The Cable is expected to show further downside as the odds of a policy-tightening pause by the Federal Reserve (Fed) have vanished entirely, and more interest rate hikes are expected to continue its battle against stubborn inflation.

Renewed concerns of more policy tightening by the Fed and disappointed quarterly earnings forced S&P500 to settle last week with the highest losses since December. This has strengthened the risk-aversion theme further. Also, the Pentagon shot down an unidentified object over Alaska on Saturday. This is the second event in less than a week after the Pentagon shot down the spy Chinese balloon, which was later identified as a civilian by the Chinese administration. The events portray more traction for the risk-off impulse.

The US Dollar Index (DXY) looks set to add gains above 103.35 ahead of the United States Consumer Price Index (CPI) data, scheduled for Tuesday. A Reuters poll expects further upside in the monthly headline and core inflation by 0.4%.

Philadelphia Fed President Patrick Harker reiterated that the central bank would continue hiking interest rates to above 5%. The Fed policymaker has favored a small interest rate hike and sees no recession ahead. Also, the expression of a rate cut is unlikely this year.

On the United Kingdom front, preliminary Gross Domestic Product (GDP) data for Q4 remained stagnant, as expected by the market participants. Also, the annual GDP matched expectations of 0.4% expansion vs. the former release of 1.9%. The Manufacturing and Industrial Production remained negative but delivered less contraction than expected.

UK Finance Minister Jeremy Hunt said, “The fact the UK was the fastest growing economy in the G7 last year, as well as avoiding a recession, shows our economy is more resilient than many feared." He added, “If we stick to our plan to halve inflation this year, we can be confident of having amongst the best prospects for growth anywhere in Europe.”