GBP/USD edges lower to near 1.2200 as UK Gilt yields drop
- GBP/USD faces pressure as UK Gilt yields decline following lower-than-expected UK inflation.
- The yield on the UK 10-year Gilt dropped to 4.73%, pulling back from multi-decade highs.
- The US Dollar depreciated following the softer US Consumer Price Index inflation data for December.
GBP/USD edges lower after two days of gains, trading around 1.2220 during the Asian hours on Thursday. The Pound Sterling (GBP) receives downward pressure following lower-than-expected inflation data from the United Kingdom (UK) released on Wednesday.
The yield on the UK 10-year Gilt fell to 4.73%, retreating from multi-decade highs, after official data showed an unexpected drop in headline UK inflation, increasing expectations of rate cuts by the Bank of England (BoE).
The UK Consumer Price Index (CPI) increased by 2.5% year-over-year in December, down from 2.6% in November and below the market forecast of 2.7%. Despite the slowdown, the figure remained above the Bank of England’s (BoE) 2% target.
Meanwhile, the annual core CPI, which excludes volatile food and energy items, grew by 3.2% in December, compared to a 3.5% increase in November, missing market expectations of 3.4%. Additionally, services inflation declined sharply to 4.4% year-over-year in December, down from 5% in November.
However, the GBP/USD pair gained ground as the US Dollar (USD) extended its decline following the cooler-than-expected US Consumer Price Index (CPI) inflation data for December, which heightened speculation that the US Federal Reserve (Fed) could implement two interest rate cuts this year.
The US CPI rose by 2.9% year-over-year in December, up from 2.7% in November, matching market expectations. On a monthly basis, CPI increased by 0.4%, following a 0.3% rise in November. US Core CPI, excluding volatile food and energy prices, increased by 3.2% annually in December, slightly below both the previous month's 3.3% and analysts' forecast of 3.3%. On a monthly basis, core CPI edged up by 0.2% in December 2024.
The US Dollar Index (DXY), which gauges the US Dollar's performance against six major currencies, is trading near 109.00. Meanwhile, 2-year and 10-year US Treasury bond yields are at 4.27% and 4.66%, respectively. Both yields dropped by over 2% on Wednesday as softer US core CPI data fueled expectations that the Federal Reserve’s easing cycle may continue.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
