Sterling Vulnerable as Weak Data and Yield Divergences Weigh

17 January 2025

GBP/USD traded lower on Thursday, slipping to 1.2176 before recovering to 1.2260 after dovish remarks from Fed Governor Waller lent support. Earlier, soft UK GDP and output data exacerbated concerns over the UK economy’s fragility, while mixed U.S. retail sales and claims data tempered Treasury and gilt yield rises. The pound’s decline from its recent highs reflects a growing divergence in rate expectations between the BoE and the Fed, with markets pricing in UK rate cuts in February amid sustained U.S. yield advantages.

Technical indicators suggest GBP/USD remains under bearish pressure. Resistance is seen at 1.2260, Thursday’s high, with further barriers at 1.2320 (falling 10-day moving average) and 1.2455 (50% Fibonacci retracement of the 1.2811-1.21 drop). Support lies at 1.2167 (lower 30-day Bollinger Band), 1.2140 (January 14 low), and the critical 1.21 level. A sustained break below 1.21 would open the door for a move toward late-2023 lows near 1.20 and early-March 2023 lows at 1.18, as bearish momentum accelerates.

Focus shifts to upcoming UK and U.S. economic data. UK retail sales on Friday will provide insights into domestic consumption, while U.S. industrial production, capacity utilization, and manufacturing output will shed light on Fed policy outlooks. Any signs of further UK economic weakness or robust U.S. data could deepen GBP/USD’s losses, particularly as fiscal concerns and the BoE’s dovish trajectory weigh on sentiment. Without a significant shift in market dynamics, sterling is likely to remain on the defensive, with downside risks dominating.