The Pound Sterling (GBP) is trading cautiously against its major counterparts on Thursday, as a higher-than-expected UK public sector net borrowing figure for December weighs on the economic outlook. According to the Office for National Statistics (ONS), the budget deficit widened due to rising borrowing costs and a one-off payment for the repurchase of military accommodation. This situation may compel Chancellor of the Exchequer Rachel Reeves to either increase taxes or reduce public spending, potentially stalling the UK’s already subdued growth.
The surge in the UK government’s borrowing costs is linked to fears that higher tariffs proposed by US President Donald Trump could dampen global growth prospects. This concern contributed to a sharp rise in 30-year gilt yields, which reached 5.47% on January 14, marking their highest level in over 26 years.
Looking ahead, attention is turning to the Bank of England’s (BoE) first monetary policy decision of the year, set for February 6. Market participants have largely priced in a 25 basis point rate cut, bringing borrowing rates down to 4.5%. This dovish outlook has been fueled by soft inflation data, a decline in December retail sales, and weaker labor demand in the three months to November.
Additionally, traders are closely monitoring the flash UK S&P Global/CIPS Purchasing Managers Index (PMI) data for January, due to be released on Friday. The PMI is expected to show that business activity has expanded at a slower pace, further impacting sentiment towards the pound.
On the technical front, the GBP/USD pair is attempting to break above the 20-day Exponential Moving Average (EMA) at around 1.2356, after recovering from a fresh over-one-year low of 1.2100 on January 13. The 14-day Relative Strength Index (RSI) has rebounded to 43.50, up from the 20.00-40.00 range, indicating that bearish momentum has slowed, at least temporarily.
Looking ahead, support for the pair is likely to be found near the October 2023 low of 1.2050. On the upside, key resistance levels are seen at the 20-day EMA and the round number of 1.2400.
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