The British Pound (GBP) is navigating a fragile sentiment as concerns over the UK's fiscal situation persist. The GBP/USD currency pair teeters on the edge, with a sustained break below the 1.2200 mark likely to trigger further bearish trading activity. This could extend the pair’s nearly four-month-old downtrend. December's economic data paints a mixed picture, with core inflation rising 3.2% annually, yet the overall inflation print was cooler than anticipated. This divergence has intensified speculation regarding a potential 25-basis-point interest rate cut by the Bank of England (BoE) at its upcoming policy meeting on February 6.
The UK's economic landscape remains underwhelming, as evidenced by disappointing GDP and industrial performance figures for November. The economy expanded at a modest 0.1% pace, while industrial and manufacturing production fell by 0.4% and 0.3%, respectively. These lackluster figures weigh heavily on the GBP/USD pair, further compounded by divergent policy expectations between the BoE and the US Federal Reserve (Fed).
Market participants are closely monitoring the BoE's next move, with a rate cut becoming increasingly likely amidst tepid inflationary pressures. The cooler-than-expected annual inflation rate for December has bolstered expectations for monetary easing. Analysts suggest that this potential shift in policy could provide necessary stimulus for the UK economy, albeit at the risk of further depreciating the British Pound.
Simultaneously, the US Federal Reserve’s policy stance adds another layer of complexity to the currency pair dynamics. The Fed is anticipated to pause its rate-cutting cycle later this month, although recent US economic data has left room for speculation. The US Consumer Price Index (CPI) figures released on Wednesday have increased the likelihood of the Fed cutting rates twice this year, amid sharply declining US Treasury bond yields following softer-than-expected producer prices.
Technical indicators add to the narrative of potential volatility for the GBP/USD pair. The Relative Strength Index (RSI) on the daily chart indicates that the pair is nearing oversold territory, raising prospects for a corrective bounce. However, immediate resistance looms at the 1.2240 region, with the 1.2280 area representing a significant hurdle, aligning with the 38.2% Fibonacci retracement level from the monthly peak.
Upcoming US economic releases, specifically Retail Sales and Jobless Claims data, are poised to further influence the GBP/USD pair's trajectory. Should these figures deviate from expectations, they could either exacerbate or alleviate pressures on the currency pair.