13 Jan 2025

The Pound Sterling is experiencing a significant decline as increasing borrowing costs for the UK government may compel the administration to reduce public expenditure.

Unexpectedly positive US Non-Farm Payroll data has led traders to reassess their expectations regarding a dovish stance from the Federal Reserve.

Market participants are now looking forward to the release of the UK and US inflation data for December, scheduled for Wednesday.

The Pound Sterling (GBP) continues to decline against its major counterparts at the beginning of the week. The British currency is under persistent selling pressure, exacerbated by rising yields on 30-year gilts in the United Kingdom, which heighten concerns regarding the country's economic prospects.

Yields on 30-year UK gilts have surged to approximately 5.47%, marking the highest level since 1998. Analysts attribute this increase in gilt yields, in part, to the uncertainty surrounding the forthcoming trade policies of United States President-elect Donald Trump, who is scheduled to assume office on January 20. Additionally, the UK's significant dependence on foreign financing to meet domestic spending demands contributes to these concerns.

Deutsche Bank noted, "The greater a country's reliance on foreign financing for its domestic debt issuance, the more susceptible it becomes to the global economic environment," further stating that, in terms of external financial flows, the UK ranks among the "most vulnerable in the G10."

The escalating borrowing costs faced by the UK government have put at risk Chancellor of the Exchequer Rachel Reeves's strategy to finance daily expenditures through tax revenues while implementing cuts to public spending. Nevertheless, UK Treasury Minister Darren Jones emphasized in the House of Commons on Thursday that the government's commitment to borrowing solely for investment purposes is "non-negotiable."

Looking ahead, the upcoming release of the UK Consumer Price Index (CPI) data for December, scheduled for Wednesday, will serve as a crucial indicator for the Pound Sterling. This consumer inflation data is expected to have a substantial impact on market expectations regarding the monetary policy direction of the Bank of England (BoE). Presently, UK rate futures indicate that traders are reducing their dovish outlook for the BoE, anticipating a 44 basis points (bps) interest rate cut this year, in contrast to the 50 bps projected the previous week.

Daily digest market movers: Pound Sterling weakens against US Dollar ahead of UK-US inflation data

The Pound Sterling reached a new annual low, approaching 1.2120 against the US Dollar (USD) on Monday. The GBP/USD pair experienced a decline as the US Dollar gained strength, following traders' adjustments to their dovish expectations for the Federal Reserve (Fed) after the unexpectedly strong US Nonfarm Payrolls (NFP) report for December.

The US Dollar Index (DXY), which measures the value of the Greenback against six major currencies, rose to a level not seen in over two years, nearing 110.00. The NFP report indicated robust labor demand and a decrease in the Unemployment Rate, alleviating concerns regarding a potential slowdown in the job market. This development has prompted Fed officials to consider a more aggressive policy-easing cycle, with a significant cut of 50 basis points (bps) anticipated in September.

Analysts at Macquarie predict that the Fed will implement only one rate cut this year, with the current interest rate cycle expected to bottom out between 4.00% and 4.25%.

This week, market participants will be closely monitoring the US Producer Price Index (PPI) and Consumer Price Index (CPI) data for December, scheduled for release on Tuesday and Wednesday, respectively. Persistent inflationary signals could further diminish the likelihood of dovish actions from the Fed.

Technical Analysis: Pound Sterling posts fresh yearly low near 1.2120

The Pound Sterling has reached a new low, falling to approximately 1.2120 against the US Dollar during the European session on Monday, marking its lowest point in over a year. This decline in the GBP/USD pair was initiated after it fell below the January 2 low of 1.2350.

The downward trajectory of the 20-day Exponential Moving Average (EMA), currently positioned around 1.2450, indicates a significantly bearish short-term trend.

The 14-day Relative Strength Index (RSI) has decreased to about 26.70, the lowest level observed since October 2023, reflecting a robust bearish momentum. Nevertheless, a minor rebound cannot be dismissed, as the momentum oscillator indicates oversold conditions.

In terms of support, the pair is anticipated to find a level near the October 2023 low of 1.2050. Conversely, the 20-day EMA is expected to serve as a critical resistance point.