The GBP/USD pair has encountered some downward pressure as the US dollar continues to strengthen against various major currencies. For instance, the AUD/USD recently reached a 13-month low due to a dovish tone from the Reserve Bank of Australia (RBA) and concerns regarding demand from China affecting the Australian dollar. Meanwhile, the EUR/USD pair is once again probing the 1.05 level, fueled by expectations that the dollar will maintain its yield advantage over the euro and other currencies once the anticipated government spending initiatives and tax reforms proposed by the Trump administration are enacted next year. In contrast, the GBP/USD is just beginning to retrace after a solid recovery of 2.5 weeks from the 1.25 mark. The strength of the pound is further illustrated by the weakening EUR/GBP, which is testing the 0.82 support area, allowing sterling to achieve its highest levels against the euro since March 2022. However, compared to the dollar, the pound has not fared as well. There is a reasonable chance that the GBP/USD might continue its descent and potentially break below the 1.2500 support level, especially if UK services inflation shows a significant decline, possibly in early next year. Such a scenario would create room for the Bank of England (BoE) to adopt a more dovish stance, leading to a bearish outlook for the GBP/USD as we approach 2025.
GBP/USD forecast: Anticipation for US CPI
This week has been relatively quiet for European economic data, with market participants keenly awaiting two significant events: today’s US Consumer Price Index (CPI) report, expected shortly at 13:30 GMT, and tomorrow’s European Central Bank (ECB) policy decision.
The US CPI is anticipated to rise slightly to 2.7% year-over-year, up from 2.6%, marking the last major data release prior to the upcoming Federal Reserve meeting. Although the Fed appears to be shifting its focus away from inflation metrics, any surprise in the core inflation rate—set at a consensus forecast of 0.3% month-on-month—could provide a boost for the dollar.
While the December rate decision is unlikely to depend heavily on this CPI print, an unexpectedly high result could influence the Fed’s outlook for early 2025. Following a weaker-than-expected Non-Farm Payroll (NFP) report last Friday, market expectations are now almost fully aligned with a 25 basis point cut in December, shifting up from approximately 70% a week ago. Thus far, this has not significantly changed the trajectory of GBP/USD, but it suggests that investors remain inclined toward the dollar due to anticipated US policies aimed at increased spending and tax reductions in 2025, which could sustain inflation risks.
Pound Strengthening Against the Euro
In comparison to the euro, the pound benefits from a more stable governmental framework and some fiscal stimulus. Meanwhile, political gridlock in several regions of continental Europe is a significant factor contributing to the euro's struggles. Consequently, the UK’s growth outlook for the coming year appears more favorable than that of the eurozone. However, this does not guarantee a rise in GBP/USD. In fact, any potential shift in the BoE’s policy tone in February, should services inflation continue to decline, might pose risks for the pound against other major currencies.
Technical Analysis of GBP/USD: Key Levels to Monitor
From a technical analysis perspective, the outlook for GBP/USD appears slightly bearish again. With the upcoming CPI release, traders may want to hold off on making significant moves until the data is revealed.
Short-term support is currently situated around the 1.2715 mark. A decisive break below this level today could lead to a retest of the bullish trend line, which has been reconstituted after a brief breakdown, near the 1.2600-1.2620 region. Should that support level fail, the psychological milestone of 1.25 looms, which is where the pair last found support after dipping to a low of 1.2487 in November.
On the resistance front, if the price continues to rise, watch the range between 1.2800 and 1.2870. This area defined previous support and resistance levels and is also where the 200-day moving average comes into play.
-- Analysis by Financial Expert
