GBP/USD drops sharply below 1.2530 following weaker UK GDP data, eyes on Fed rate decision

The GBP/USD pair drops sharply below the mid-1.2500s during the early European session on Wednesday. The weaker-than-expected UK GDP growth data and Industrial Production weigh on the British Pound (GBP) and create a headwind to the GBP/USD. At press time, GBP/USD is trading at 1.2528, losing 0.34% for the day.

The latest data from the Office for National Statistics on Wednesday showed that UK Gross Domestic Product (GDP)  contracted by 0.3% MoM in October, worse than the 0.1% decline expected and swinging from a 0.2% expansion in September.

Meanwhile, the nation's Industrial Production data for October also came in worse than market expectations, falling by 0.8% MoM. Manufacturing Production dropped by 1.1% MoM versus a 0.1% rise in the previous reading.

The Bank of England (BoE) is anticipated to keep its interest rate unchanged at 5.25% for a third consecutive meeting on Thursday. Markets are pricing three rate cuts next year total of 100 basis points (bps) of rate cuts in 2024. This would bring the rate down to 4.25%, according to ING.

The Fed is widely expected to hold borrowing costs steady on Wednesday. The markets anticipate that Fed Chair Jerome Powell will maintain that cautious approach and push back against the odds for rate cutting. However, the Fed fund futures are pricing in an 80% possibility of a rate cut in May, according to the CME FedWatch Tool.

Tuesday's publication of inflation data indicated that price increases in November remained moderate. The US Consumer Price Index (CPI) grew by 0.1% MoM from 0% in the previous reading and rose by 3.1% YoY in November versus 3.2% prior. Both numbers were in line with the market consensus. Additionally, the Core CPI, which excludes volatile food and energy prices, rose by 0.3% MoM from the 0.2% estimated, while the annual core CPI surged 4.0% YoY, as expected.

The US Producer Price Index (PPI) for November will be released on Wednesday, which is expected to show an increase of 0.1% MoM and 1.0% YoY, respectively. The PPI ex Food & Energy is estimated to ease from 2.4% to 2.2% YoY. Later on Wednesday, the Fed will announce the interest rate decision at its last meeting of the year, followed by a press conference. On Thursday, the Bank of England (BoE) will announce its decision on monetary policy. These events could give a clear direction to the GBP/USD pair.

(This story was corrected on December 13 at 07:32 GMT to say that UK GDP contracted 0.3% on month in October, not in the three months to October. It was also corrected to say that market expectations were for a 0.1% monthly decline, not a 0.2% expansion.)