GBP/USD rises after UK inflation cools

• UK CPI falls to 2.5% YoY from 2.6%
• Service sector inflation falls to 4.4% from 5%
• Rate cut expectations rise 12 basis points
• GBP/USD inches higher

GBP/USD is edging higher after cooler-than-expected inflation helped pull gilt yields lower

UK CPI unexpectedly fell to 2.5% YoY in December, down from 2.6% and below forecasts of 2.7%. Meanwhile, service sector inflation, which the Bank of England is watching closely, cooled by more than expected to 4.4%, well below the 4.8% predicted and down from 5% in November. Sticky service sector inflation has hindered the BoE from cutting interest rates further.

 Following the data the market has ramped up BoE rate cut expectations, adding 12 basis points to bets for 2025 cuts, which are now seen at 49 basis points across the year. This is still short of the central bank’s forecast for 4 rate cuts this year.

Usually, with rising rate cut expectations, the pound would fall. However, today’s data has also pulled guilty yields sharply lower, dropping by around 9 basis points on the 2-year bond, the most sensitive to Bank of England policy, which is helping to support the pound.

The data is a step in the right direction but it doesn’t mean that the UK is out of the woods just yet, particularly given that a recent survey by the British Retail Consortium shows that 2/3 of retailers will raise prices in response to higher employer Social Security costs from the budget which bodes poorly for progress in disinflation outlook. Meanwhile, the same survey of chief financial officers and finance directors at 52 major retailers found that around half plan to reduce staff hours and headcount.

There are also growing worries about UK growth, which has been on a downward trajectory since labour came to power in July. This, combined with the prospect of sticky inflation, means a stagflationary outlook is a very real problem. UK GDP data is due tomorrow and will provide further clues about the health of the UK economy.

Attention also turns to the US CPI, which is due later today and is expected to rise to 2.9% from 2.7%. What inflation could further dampen rate cut expectations, boosting the USD and pulling GBP USD lower?

GBP/USD forecast – technical analysis

GBP/USD trended lower from 1.34 to a low of 1.21 at the start of the week. The price recovered from 1.21 and trades back above the 1.22 level, bringing the RSI out of oversold territory. The long-term downtrend remains intact, but the hammer candlestick and the long lower wicks on candles this week suggest that the bottom could be in, and a bullish reversal could be in the cards.

Buyers will look to extend gains above 1.23, the April low, before focusing on 1.25, the December low into focus.

Sellers will need to take out the 1.21 low to extend losses to 1.2050, the 2023 low, and 1.20, the psychological level.

USD/JPY falls ahead of US CPI

• Yen rises after hawkish BoJ comments
• US CPI is expected to rise to 2.9% from 2.7%
• USD/JPY tests 157.1 support

USD/JPY is falling amid a stronger yen following hawkish BoJ’s Ueda remarks. However, those gains could be short-lived ahead of US inflation data.

Governor Ueda reiterated the central bank’s commitment to raising borrowing costs if the economy continues to improve. His comments followed days of the OJ deputy governor him me know on Tuesday. The end raise as markets priced in the possibility of a rate hike at next weeks meeting.

Comments from Finance Minister Kato, who revived concerns about potential government intervention in the FX markets, also supported the yen.

Attention is now turning to US inflation data, which is expected to show that CPI increased 2.9% from 2.7% in November, marking its fifth straight monthly increase and moving further from the Fed’s 2% target.

Worries about hot inflation are already rampant in the market, with treasury yields elevated. I mean, the resilient U.S. economy and ahead of Trump’s administration. Trump is expected to implement inflationary policies.

Hotter-than-expected inflation could see the market further resist Fed rate cut bets. Currently, the market sees just one rate shot right at the end of this year. This could see USD/JPY recover higher above 158.

USD/JPY forecast – technical analysis

After a strong run-up from the 148.65 low, USD/JPY has been consolidating just below 158. The price is testing support at the 78.6% fib retracement at 157.10, as the MACD shows a bearish cross-over.

Should sellers meaningfully break below 157.10 and 156.75 the November high, a deeper selloff towards 155 round number and 152.40 the 61.8% fib level could be on the cards.

Should the 157.10-156.75 support zone hold, buyers will look to extend gains above 168.80, the 2025 high, towards 160 and 162, the 2024 high.

• UK consumer inflation increased by a smaller-than-expected 2.5% annually.

• Market participants increased the likelihood of a Feb BoE rate cut from 60% to 80%.

• Economists expect US consumer inflation to increase by 2.6% annually.

The GBP/USD forecast shows a bright day for the pound despite downbeat UK inflation figures. A decline in UK yields has relieved the currency after its recent plunge. On the other hand, the dollar halted its rally after soft wholesale inflation data. Moreover, traders eagerly await the CPI report for more clues on future Fed moves. 

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Data on Wednesday revealed that UK consumer inflation increased by 2.5% annually. This was a smaller number than the forecast of 2.6%. As a result, market participants increased the likelihood of a Feb BoE rate cut from 60% to 80%.

The pound dropped in response, but only for a while. The increase in rate-cut bets also led to a drop in UK yields, which have rallied in recent weeks. The rally had caused uncertainty about UK finances and the economy, hurting the pound. Therefore, Wednesday’s pullback came as a welcome surprise, boosting sterling.

The pound also got support from a weak dollar. The greenback eased on Tuesday after cooler-than-expected wholesale inflation data. However, all focus is on the upcoming US consumer inflation report. Economists expect inflation to increase by 2.6% annually, holding from the previous month. A surprising number will cause volatility by shifting the outlook for Fed rate cuts.

GBP/USD key events today

• US core CPI m/m
• US CPI m/m
• US CPI y/y

GBP/USD technical forecast: Pullback pauses as 30-SMA poses a challenge

On the technical side, the GBP/USD price has rebounded to retest the 30-SMA resistance after making a new low at the 1.2102 support level. At the same time, the price has revisited the 1.2250 resistance level. However, the downtrend remains intact as the price trades below the 30-SMA with the RSI in bearish territory. 

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The rebound has been a corrective move, with both bears and bulls showing some strength. However, the price must make an impulsive leg for the price to start trending. Therefore, if bears are ready to resume the downtrend, the price will make a new swing low below the 1.2102 support level. 

On the other hand, an impulsive leg to break above the 30-SMA would signal a shift in sentiment that would likely lead to a bullish reversal.

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GBP/USD rises after UK inflation cools

• UK CPI falls to 2.5% YoY from 2.6%
• Service sector inflation falls to 4.4% from 5%
• Rate cut expectations rise 12 basis points
• GBP/USD inches higher

GBP/USD is edging higher after cooler-than-expected inflation helped pull gilt yields lower

UK CPI unexpectedly fell to 2.5% YoY in December, down from 2.6% and below forecasts of 2.7%. Meanwhile, service sector inflation, which the Bank of England is watching closely, cooled by more than expected to 4.4%, well below the 4.8% predicted and down from 5% in November. Sticky service sector inflation has hindered the BoE from cutting interest rates further.

 Following the data the market has ramped up BoE rate cut expectations, adding 12 basis points to bets for 2025 cuts, which are now seen at 49 basis points across the year. This is still short of the central bank’s forecast for 4 rate cuts this year.

Usually, with rising rate cut expectations, the pound would fall. However, today’s data has also pulled guilty yields sharply lower, dropping by around 9 basis points on the 2-year bond, the most sensitive to Bank of England policy, which is helping to support the pound.

The data is a step in the right direction but it doesn’t mean that the UK is out of the woods just yet, particularly given that a recent survey by the British Retail Consortium shows that 2/3 of retailers will raise prices in response to higher employer Social Security costs from the budget which bodes poorly for progress in disinflation outlook. Meanwhile, the same survey of chief financial officers and finance directors at 52 major retailers found that around half plan to reduce staff hours and headcount.

There are also growing worries about UK growth, which has been on a downward trajectory since labour came to power in July. This, combined with the prospect of sticky inflation, means a stagflationary outlook is a very real problem. UK GDP data is due tomorrow and will provide further clues about the health of the UK economy.

Attention also turns to the US CPI, which is due later today and is expected to rise to 2.9% from 2.7%. What inflation could further dampen rate cut expectations, boosting the USD and pulling GBP USD lower?

GBP/USD forecast – technical analysis

GBP/USD trended lower from 1.34 to a low of 1.21 at the start of the week. The price recovered from 1.21 and trades back above the 1.22 level, bringing the RSI out of oversold territory. The long-term downtrend remains intact, but the hammer candlestick and the long lower wicks on candles this week suggest that the bottom could be in, and a bullish reversal could be in the cards.

Buyers will look to extend gains above 1.23, the April low, before focusing on 1.25, the December low into focus.

Sellers will need to take out the 1.21 low to extend losses to 1.2050, the 2023 low, and 1.20, the psychological level.

USD/JPY falls ahead of US CPI

• Yen rises after hawkish BoJ comments
• US CPI is expected to rise to 2.9% from 2.7%
• USD/JPY tests 157.1 support

USD/JPY is falling amid a stronger yen following hawkish BoJ’s Ueda remarks. However, those gains could be short-lived ahead of US inflation data.

Governor Ueda reiterated the central bank’s commitment to raising borrowing costs if the economy continues to improve. His comments followed days of the OJ deputy governor him me know on Tuesday. The end raise as markets priced in the possibility of a rate hike at next weeks meeting.

Comments from Finance Minister Kato, who revived concerns about potential government intervention in the FX markets, also supported the yen.

Attention is now turning to US inflation data, which is expected to show that CPI increased 2.9% from 2.7% in November, marking its fifth straight monthly increase and moving further from the Fed’s 2% target.

Worries about hot inflation are already rampant in the market, with treasury yields elevated. I mean, the resilient U.S. economy and ahead of Trump’s administration. Trump is expected to implement inflationary policies.

Hotter-than-expected inflation could see the market further resist Fed rate cut bets. Currently, the market sees just one rate shot right at the end of this year. This could see USD/JPY recover higher above 158.

USD/JPY forecast – technical analysis

After a strong run-up from the 148.65 low, USD/JPY has been consolidating just below 158. The price is testing support at the 78.6% fib retracement at 157.10, as the MACD shows a bearish cross-over.

Should sellers meaningfully break below 157.10 and 156.75 the November high, a deeper selloff towards 155 round number and 152.40 the 61.8% fib level could be on the cards.

Should the 157.10-156.75 support zone hold, buyers will look to extend gains above 168.80, the 2025 high, towards 160 and 162, the 2024 high.

Created on January 15, 2025

• For the second consecutive trading day, the EUR/USD currency pair has attempted to halt its recent sharp decline, which extended to a low of 1.0177, the lowest level for the currency pair in over two years.
• Stability is cautious until the announcement of US inflation figures, which will strongly affect expectations for the future policies of the US Federal Reserve under Trump.

Central Bank Policies Impact Exchange Rates

According to recent trades, investors in the $13 trillion high-grade corporate bond market are focusing on an unprecedented divergence between expected US and European monetary policy paths. US Treasury yields are likely to outperform their European counterparts as the European Central Bank is still expected to deliver several interest rates cuts this year, while the Federal Reserve is seen keeping US interest rates higher for longer, according to some fund managers.

This divergence has not been seen early in the year for as long as Bloomberg has tracked interest rate expectations for the US Federal Reserve, the European Central Bank, and the Bank of England. The only notable divergence at the beginning of the year was recorded in 2023, when traders were pricing in rising interest rates – a backdrop typically associated with falling bond prices – rather than cuts.

Also, the divergence between the policies of the European Central Bank and the Federal Reserve weighs heavily on the euro-dollar exchange rate.

Interest Rate Expectations for 2025

Investors and markets expect the European Central Bank to cut interest rates by 25 basis points more than three times by the end of 2025, even after they lowered their expectations in recent days. In contrast, they expect only one cut from the US Federal Reserve after US jobs data showed that the US labor market remains strong. According to officials, the European Central Bank should continue to cut interest rates, regardless of what the US Federal Reserve does.

In general, market expectations for central bank cuts can certainly change quickly with the release of new economic data. At the beginning of December 2024, traders were pricing in more than three cuts by the Federal Reserve in 2025.

Trading Tips:

Dear follower of the TradersUp website, the euro-dollar is still on its way to parity. So, be careful, do not take risks, and always monitor the factors affecting the performance of the currency pair.

EUR/USD Technical Analysis Today:

Dear reader, there is no change in my technical outlook for the EUR/USD pair. The overall trend remains bearish, and the recent rebound is temporary. Investors are awaiting important US economic events. Currently, the closest support levels for the euro dollar are 1.0220, 1.0170, and 1.0080. technically, these levels are sufficient to push technical indicators towards oversold levels. The Relative Strength Index and the MACD are in the bearish zone. Furthermore, we still recommend selling the euro dollar at every opportunity.

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Platinum price lost the positive momentum yesterday to force it to form temporary negative rebound and notice its stability near the additional support 935.00$, to settle above it and reinforce the chances of renewing the bullish attempts again.

Also, 920.00 level continues to form major support against the current trades, allowing us to wait to gather the positive momentum again to manage to surpass the MA55 at 955.00$ followed by extending trades towards the next main target at 983.00$.

The expected trading range for today is between 930.00$ and 955.00$

Trend forecast: Bullish