GBP/USD edges higher to near 1.2710 on prevailing risk-on mood

GBP/USD retraces its recent losses registered on Friday, trading higher near 1.2720 during the Asian session on Monday. The Pound Sterling (GBP) makes advances against the US Dollar (USD), a movement potentially linked to the prevailing risk-on market sentiment. However, challenges arose for the GBP/USD pair following the release of lackluster December Retail Sales data from the United Kingdom (UK) on Friday.

Office for National Statistics (ONS) released the monthly Retail Sales data for December, revealing a notable decline of 3.2%, compared to the previous figure of 1.4%. This exceeded the anticipated decrease of 0.5%. On an annual basis, the data indicated a decrease of 2.4%, contrasting with the expected increase of 1.1%.

The significant drop in consumer spending poses a potential obstacle for the Bank of England (BoE) in maintaining a tight policy without risking a downturn in the economy. The policymakers of the Bank of England (BoE) will observe further data to gauge whether underlying inflation is on track to return to the targeted 2.0% level in a timely and sustainable manner.

The US Dollar Index (DXY) extends its losses for the second straight session on a weaker 10-year US yield, which could be attributed to the market expectations that the US Federal Reserve (Fed) would reduce policy rates by more than any other major central bank in the world in 2024. The DXY trades around 103.10 with 10-year US bond yield trading lower at 4.11%. While the 2-year yield stands at 4.39%, at the time of writing.

However, the US Dollar may find support, given the safe-haven status, amid concerns regarding maritime trade in the Red Sea. Both the US and the UK seek to escalate their campaign without triggering a broader conflict with Iran, resulting in more ships diverting away from the Suez Canal and the Red Sea. Shipping vessels are carefully evaluating the risks associated with navigating the Red Sea, as rising insurance costs become a significant factor.

This geopolitical threat has the potential to amplify risk aversion sentiments, prompting traders to seek refuge in safe-haven assets, which could increase the demand for the US Dollar, which in turn, exerts downward pressure on the GBP/USD pair.

On Friday, San Francisco Fed President Mary Daly shared her perspective, stating that the central bank still has considerable work to do to bring inflation back down to the targeted 2.0%. She underscored that considering interest-rate cuts as an imminent measure is premature at this point.

Meanwhile, Atlanta Fed President Raphael Bostic reaffirmed his stance on expectations for rate cuts just before the Fed entered the "blackout" period before the upcoming rate meeting scheduled for January 31. Bostic reiterated his openness to adjusting his outlook on the timing of rate cuts and emphasized that the Fed continues to rely on data to guide its decisions.

In the absence of high-impact data from the United States (US) and the United Kingdom (UK), traders will observe the US Richmond Fed Manufacturing Index and the UK Public Sector Net Borrowing on Tuesday.