Pound Sterling Finds Some Breathing Space, GBP/USD Still at Risk of 1.2000

January 14, 2025 - Written by Frank Davies

STORY LINK Pound Sterling Finds Some Breathing Space, GBP/USD Still at Risk of 1.2000

The Pound hit 14-month lows against the US Dollar, close to 1.2100 on Monday before a rally to 1.2200 as the dollar corrected weaker.

A slight easing of the UK political temperature has helped provide Sterling relief.

ING is not convinced that the Pound is out of the woods yet; “Things can stabilise in the gilt and GBP markets over the coming weeks, but Cable may still drop to 1.2000 in the very near term before finding support.”

Noise surrounding the Pound has faded slightly with some easing of political tensions following Prime Minister Starmer’s insistence that Chancellor Reeves would stay in place throughout the parliamentary term.

There is, however, still notable unease surrounding the UK outlook with the 10-year yield edging higher again to 4.87% and close to 16-year highs.

The latest inflation data is due on Wednesday with the headline rate expected to remain at 2.6%.

ING commented; “There is now a tangible risk that 10-year yields will be trading above 4.90% before tomorrow morning’s UK CPI print. Should that come in hotter than expected, selling pressure can intensify into the 5.0% handle and potentially beyond.”

It added; “While sterling generally appreciates on inflation surprises, its current indirect correlation with rates means the risks are definitely skewed to the downside.”

The dollar grabbed headlines during the Asian session following another report on US tariffs.

According to sources, economic advisers including Treasury Secretary nominee Bessent are considering a plan to raise tariffs by 2-5% per month rather than imposing a sharp increase on day one.

This strategy would gradually increase pressure on oversees countries without triggering a sharp increase in domestic inflation.

MUFG notes that decisions will also be taken through the prism of domestic politics.

It commented; “President-elect Trump is sensitive to financial market developments and the move higher in yields and lower for the S&P 500 could certainly have an influence in the type of tariff plan announced. A gradual approach does make sense in that regard.”

According to Commonwealth Bank of Australia strategist Carol Kong; “Dollar weakness can be sustained unless President Trump denies the reporting like he did in reaction to the report by the Washington Post.”

Given the risk of rebuttal by Trump, markets are unlikely to buy into the reports fully.

Win Thin, global head of currency strategy at Brown Brothers Harriman & Co commented; “You can’t chase this thing, as a denial will be coming soon. Look through the noise and rest assured the dollar rally will continue on the US economic outperformance alone.”

US economic data will also be monitored closely with two important inflation releases over the next two days. The producer prices data is due on Tuesday ahead of consumer prices data on Wednesday.

ING commented; “The US releases PPI figures for January today, where the core measure is expected to accelerate at an unwelcoming 0.3% MoM. That should cast more doubts about further Fed easing and give the dollar extra support into tomorrow’s CPI.”

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TAGS: Pound Dollar Forecasts