The GBP/USD exchange rate fell below 1.2400 following the release of stronger-than-expected US Consumer Price Index (CPI) data. The pair traded at 1.2387, representing a decline of 0.47% after the latest US inflation report. The Relative Strength Index (RSI) suggests that momentum remains bearish for the GBP/USD pair, raising concerns among traders about potential further declines.
The US Bureau of Labor Statistics (BLS) reported that annual inflation rose to 3% in January, marking the first time the year-over-year (YoY) CPI increased above 3% since June 2024. The month-over-month (MoM) figures also exceeded expectations, jumping 0.5% from December’s 0.4%, further fueling market reactions. This unexpected rise has led to a strengthening of the US Dollar as investors now anticipate that the Federal Reserve's first rate cut will not occur until September 2025.
Traders are closely monitoring developments in anticipation of Fed Chair Jerome Powell's upcoming testimony at the US House of Representatives. The testimony could provide valuable insights into future monetary policy directions, given the recent inflation data. Meanwhile, the swaps market has adjusted its expectations, pricing in 20 basis points of easing towards the September 17 meeting, down from last week’s projection of 45 basis points.
A daily close below the 1.2400 level could potentially lead to increased selling pressure for the GBP/USD pair. Such a scenario may see the pair heading towards the February 11 low of 1.2332, followed by the February 3 low of 1.2248. The price action suggests that while the pair remains tilted to the downside, it is likely to consolidate within the 1.2330 – 1.2450 range for now.
In parallel, the benchmark 10-year US Treasury bond yield surged nearly 2% on the day, surpassing 4.6% following the stronger-than-expected CPI report for January. This rise in bond yields reflects increased investor confidence in the US economy and bolsters expectations for continued monetary tightening by the Federal Reserve.
The National Institute of Economic and Social Research (NIESR) weighed in on the Bank of England's (BoE) monetary policy prospects, projecting that there is limited room for further rate cuts in the near term. According to NIESR, the BoE is expected to cut rates once in 2025 and again in 2026. This outlook contrasts with current market expectations and adds another layer of complexity to the economic landscape.
The combination of rising US inflation and expectations for prolonged monetary tightening has created a challenging environment for the British Pound against the US Dollar. The GBP/USD's current bearish momentum may persist as traders continue to assess economic data and monetary policy signals from both sides of the Atlantic.