The GBP/USD currency pair has breached the 1.2350 horizontal support level, signaling a tumultuous period for the British Pound. This movement comes as the UK government bond yields have surged following the Labour government's budget announcement in October. Meanwhile, in the United States, nonfarm payroll data revealed an addition of 256,000 jobs in December, surpassing expectations and underscoring the strength of the US labor market.
The impressive US jobs report exceeded the anticipated 160,000 figures and last month's revised reading of 212,000. This robust job growth has bolstered the US Dollar, propelling it to a two-year high amid hawkish expectations from the Federal Reserve. Conversely, the British Pound has been struggling due to concerns over stagflation, leading to its underperformance against major currencies.
In the European session, the GBP/USD pair faced significant selling pressure around the 1.2150 mark. This marks the fifth consecutive day of decline, with the pair hitting its lowest level since November 2023. Technical indicators suggest a continuation of this downward trend, with a projected double-digit pullback on the horizon. The Moving Average Convergence Divergence (MACD) indicator shows a bearish crossover, further indicating a potential decline in the pair's value.
The USD Index (DXY) remains strong, maintaining its position near a two-year peak due to the Federal Reserve's hawkish stance. This strength is largely attributed to the positive US economic data, which has reinforced expectations of aggressive monetary tightening by the Fed. In contrast, the Euro has been negatively impacted by dovish commentary from the European Central Bank (ECB).
Adding to the pressure on the British Pound, UK rate futures suggest a possible interest rate cut by the Bank of England by the end of 2025, amounting to approximately 44 basis points (bps). This potential easing of monetary policy could further weaken the GBP.
The breakdown of the GBP/USD pair below the 1.2350 support level highlights the ongoing challenges faced by the British economy. The recent spike in UK government bond yields reflects market concerns over fiscal policy direction under the current Labour government. The budget plan unveiled in October has raised uncertainty among investors, contributing to the Pound's decline.
In contrast, the robust US jobs data has fortified the US Dollar's position. The addition of 256,000 jobs in December indicates sustained economic growth, surpassing market expectations and reinforcing confidence in the US economy. This positive outlook supports the Federal Reserve's case for continued monetary tightening, which has strengthened the US Dollar against its counterparts.
The technical outlook for the GBP/USD pair suggests further downside risks. The MACD indicator's bearish crossover points to continued selling pressure on the pair. Traders and analysts are closely monitoring these developments, anticipating a potential continuation of the downward trajectory.
The US Dollar's strength is further evidenced by its firm stance amid hawkish Federal Reserve expectations. The central bank's commitment to curbing inflation through interest rate hikes has bolstered investor confidence in the US Dollar. This sentiment is reflected in the USD Index (DXY), which hovers near its highest level in over two years.
Meanwhile, dovish commentary from the European Central Bank has weighed on the Euro, adding complexity to currency market dynamics. The ECB's cautious approach contrasts with the Federal Reserve's aggressive stance, impacting currency valuations across the board.
As investors navigate these turbulent market conditions, attention remains focused on key economic indicators and central bank policies. The interplay between fiscal policies in the UK and monetary strategies in both Europe and the United States will continue to shape currency movements in the coming months.