Pound Sterling faces pressure as UK inflation cools in December

• The Pound Sterling sees a negative reaction after a softer-than-expected UK CPI report for December.
• Soft UK inflation data would prompt traders to price in a higher number of BoE interest rate cuts for the year.
• The US Dollar corrects after slower-than-expected US PPI data, awaiting the US CPI report for December.

The Pound Sterling (GBP) wildly reacts in Wednesday's London session after the release of the United Kingdom (UK) Consumer Price Index (CPI) report for December, which revealed that inflationary pressures grew moderately. The CPI report showed that annual headline inflation surprisingly rose at a slower pace of 2.5% compared to 2.6% in November. Economists expected the inflation data to have accelerated to 2.7%.

On a monthly basis, headline inflation rose by 0.3%, faster than the 0.1% growth in November but slower than estimates of 0.4%.

The core CPI - which excludes volatile items such as food, energy, oil, and tobacco - grew by 3.2% year-over-year, slower than estimates of 3.4% and the former reading of 3.5%.

Services inflation, a closely watched indicator by Bank of England (BoE) officials, decelerated to 4.4% from 5% in November. This sharp slowdown suggests that the BoE would cut interest rates faster this year than in 2024. This scenario would be unfavorable for the near-term outlook of the Pound Sterling.

Meanwhile, the British currency was already underperforming as rising yields on UK gilts have jeopardized Chancellor of the Exchequer Rachel Reeves' decision not to fund day-to-day spending through foreign borrowings. 30-year UK gilt yields have risen to near 5.47%, the highest level over 26 years. UK yields surged as market participants turned cautious over the UK economic outlook on the back of a likely trade war with the United States (US). President-elect Donald Trump is expected to raise import tariffs heavily, a scenario that will falter the UK's export sector, being one of the leading trading partners of the US.

Daily digest market movers: Pound Sterling underperforms US Dollar ahead of US inflation data

• The Pound Sterling slightly recovers against the US Dollar (USD) to near 1.2240 in Wednesday's European session after the release of the UK inflation data. The GBP/USD pair declined as an immediate reaction to the data as softer-than-expected UK CPI data has weighed on the Pound Sterling. However, the US Dollar Index (DXY), which gauges the Greenback's value against six major currencies, also trades cautiously near the five-day low of 109.05. The Greenback corrected sharply on Tuesday after the US Producer Price Index (PPI) data for December showed a slower-than-expected growth in producer inflation.
• A moderate increase in the US PPI data eased fears that price pressures would remain stubborn, but market expectations that the Federal Reserve (Fed) would cut interest rates more than once this year didn't accelerate. Market participants expect that the inflation outlook will remain stubborn, as policies such as immigration controls, higher tariffs, and lower taxes under Trump's administration will boost the economic outlook by fuelling demand for domestically produced goods and services.
• For more cues about the current status of inflation, investors will pay close attention to the US CPI data for December, which will be published at 13:30 GMT. The CPI report is expected to show that month-on-month core inflation rose at a slower pace of 0.2% from November's reading of 0.3%, with the headline reading rising steadily by 0.3%. On a yearly basis, the core CPI is expected to rise steadily by 3.3%, while the headline figure is expected to accelerate to 2.9% from the former reading of 2.7%.

Technical Analysis: Pound Sterling struggles around 1.2200

The Pound Sterling trades around the key level of 1.2200 against the US Dollar on Wednesday. The outlook for the Cable remains weak as the vertically declining 20-day Exponential Moving Average (EMA) near 1.2405 suggests that the near-term trend is extremely bearish.

The 14-day Relative Strength Index (RSI) rebounds slightly after diving below 30.00 as the momentum oscillator turned oversold. However, the broader scenario remains bearish until it recovers inside the 20.00-40.00 range.

Looking down, the pair is expected to find support near the October 2023 low near 1.2050. On the upside, the 20-day EMA will act as key resistance.