Pound Sterling continues its decline as rising UK yields impact the economic outlook

The Pound Sterling (GBP) continues its losing streak against major currencies as the week begins, facing persistent selling pressure. The British currency is weighed down by surging yields on UK 30-year gilts, which are raising concerns about the nation’s economic outlook.

UK 30-year gilt yields have soared to nearly 5.47%, the highest level since 1998. Analysts attribute the surge to uncertainties surrounding US trade policies under President-elect Donald Trump, who is set to take office on January 20, as well as the UK’s heavy reliance on foreign financing to meet domestic spending needs.

Deutsche Bank highlighted that countries heavily dependent on foreign financing for domestic debt issuance, like the UK, are particularly vulnerable to global economic conditions. The UK is considered one of the most exposed among the G10 economies.

Rising borrowing costs for the UK government have complicated Chancellor Rachel Reeves' plan to fund day-to-day spending through tax receipts while cutting public spending. However, UK Treasury Minister Darren Jones reiterated on Thursday that the government's stance on borrowing exclusively for investment remains "non-negotiable."

Looking ahead, the next key event for the Pound will be the release of UK Consumer Price Index (CPI) data for December on Wednesday. This inflation data will play a crucial role in shaping market expectations for the Bank of England's (BoE) monetary policy. Currently, UK rate futures indicate a slight reduction in dovish expectations, with traders anticipating a 44 basis point interest rate cut this year, down from 50 basis points last week.

Daily Digest Market Movers: Pound Sterling Weakens Against US Dollar Ahead of UK-US Inflation Data

• The Pound Sterling hits a fresh yearly low near 1.2120 against the US Dollar (USD) on Monday, as the GBP/USD pair weakens amid a stronger US Dollar. The Greenback strengthens as traders scale back expectations for dovish Federal Reserve (Fed) actions following the unexpectedly strong US Nonfarm Payrolls (NFP) data for December.
• The US Dollar Index (DXY), which tracks the value of the USD against six major currencies, rises to a more-than-two-year high near the 110.00 level. The NFP report revealed robust labor demand and a drop in the Unemployment Rate, easing concerns about a slowdown in the job market. This has led traders to reassess expectations of a rapid Fed policy-easing cycle, initially anticipated to involve a 50 basis point (bps) cut in September. Analysts at Macquarie now foresee only one rate cut from the Fed this year, with the interest rate cycle potentially bottoming between 4.00%-4.25%.
• This week, market attention will shift to the release of the US Producer Price Index (PPI) and Consumer Price Index (CPI) data for December, due on Tuesday and Wednesday. Any signs of persistent inflation will likely dampen expectations for further Fed dovish actions.

Technical Analysis: Pound Sterling Hits Fresh Yearly Low Near 1.2120

The Pound Sterling reaches a new more-than-a-year low near 1.2120 against the US Dollar during Monday’s European session, following a breakdown below the January 2 low of 1.2350. This move has intensified selling pressure on the GBP/USD pair.

The 20-day Exponential Moving Average (EMA), which is sloping steeply downward near 1.2450, highlights the highly bearish near-term trend.

The 14-day Relative Strength Index (RSI) drops to approximately 26.70, the lowest since October 2023, signaling strong bearish momentum. While the market remains in oversold conditions, a slight recovery is still possible.

Looking ahead, support for the pair is likely to emerge near the October 2023 low of 1.2050. On the upside, the 20-day EMA will act as a key resistance level to watch.