Chart of the Day - GBPUSD (17.01.2025)

Sterling faces renewed pressure as disappointing UK retail sales data reinforces concerns about economic stagnation, prompting increased speculation for earlier Bank of England rate cuts amid signs of persistent economic weakness. The pound has declined to $1.2166, representing a significant drop of 0.6% during today's trading session, as market participants digest the implications of the latest economic data.

Key Market Statistics

The British pound has experienced notable volatility, trading between $1.2166 and $1.2250 during today's session. Market expectations have solidified around three potential 25-basis-point rate cuts from the Bank of England this year, while UK retail sales have registered a significant decline in December. The two-year gilt yields have also moved lower, now trading below their opening levels for 2025, reflecting growing economic concerns.

Retail Sales Impact

The December retail sales data has revealed a troubling picture of UK consumer spending, with particular weakness observed in the food sector, where sales have dropped to their lowest levels since 2013. The broader retail environment has shown significant strain, with overall retail volumes declining by 0.8% in the fourth quarter. This unexpected weakness during the traditionally strong holiday period has particularly alarmed market participants, as it suggests underlying fragility in consumer confidence despite the recent easing of inflation pressures.

BOE Policy Outlook

The Bank of England's monetary policy expectations have undergone a substantial shift following the weak retail data release. Market participants are now actively pricing in three quarter-point rate cuts for 2025, with total rate cut expectations for the year reaching 66.7 basis points. The growing concerns about economic stagnation have led to an acceleration in rate cut expectations, with many market observers now anticipating that the central bank may need to begin its easing cycle earlier than previously thought.

Implied Rate Cuts in UK. Source: Bloomberg

Market Positioning and Risk Factors

Recent analysis from Morgan Stanley suggests potential weakness in the US dollar, though sterling faces significant domestic challenges that could limit any gains from broad dollar weakness. Institutional investors have increased their short positions in sterling, while survey data indicates widespread expectations of the GBP/USD pair falling to the $1.15-1.20 range by June 2025. The options market has seen growing demand for downside protection, reflecting increased concern about sterling's prospects. The stability of the UK gilt market remains a crucial factor that could influence sterling's performance in the coming months.

GBPUSD (D1 Interval) 

The GBPUSD is approaching levels last seen at the end of October, which subsequently led to a rebound and strengthened the Sterling. Bears are likely to attempt a break below the support zone between 1.2139 and 1.2108. Conversely, bulls will target the April low at 1.235, which serves as the first resistance. The RSI has broken its bullish divergence and is nearing the oversold zone, potentially signaling continued bearish pressure, similar to its consolidation phase observed in mid-September. Meanwhile, the MACD is on the brink of a bullish crossover but remains in negative territory, indicating caution for any upward momentum. Source: xStation