Pound Sterling gains as UK yields cool down on fresh acceleration in BoE dovish bets

• The Pound Sterling outperforms its major peers as soft UK data weighs on gilt yields.
• Market experts project a 100 bps interest rate reduction by the BoE this year.
• The risk profile turns favorable for risky assets ahead of Trump's inauguration.

The Pound Sterling (GBP) bounces back against its major peers at the start of the week. Gains in the British currency are partly driven by a further advancement in demand for United Kingdom (UK) gilts due to weak UK Retail Sales data for December and an increasing demand for risky assets ahead of United States (US) President-elect Donald Trump's inauguration.

A strong buying interest for UK gilts has weighed heavily on the government's borrowing costs, pushing 30-year yields further lower to near 5.20% from its more-than-26-year high of 5.47% recorded on January 13. An unexpected decline in the UK Retail Sales data has further accelerated the Bank of England's (BoE) dovish bets. Monthly Retail Sales contracted by 0.3%, while it was expected to grow at a faster rate of 0.4% from a 0.1% increment in November. Analysts at Oxford Economics expect the BoE to cut interest rates by 100 basis points (bps) to 3.75% by the year-end.

UK gilt yields peaked last week after the release of softer-than-expected Consumer Price Index (CPI) data for December, which increased speculation for the BoE to cut its borrowing rates in the coming policy meeting on February 6.

It is worth noting that the size of the decline in UK gilt yields is larger than the recovery in the Pound Sterling as weak UK data has boosted dovish BoE bets, which are technically GBP-negative. Higher bets for lower BoE interest rates bode poorly for the Pound Sterling. Meanwhile, UK equity markets have sharply rallied in the last few trading days as Chancellor of the Exchequer Rachel Reeves won't be forced to raise taxes or cut public spending to fulfill her economic agenda. 

Going forward, the next move in the Pound Sterling will be guided by the UK employment data for the three months ending November, which will be published on Tuesday. 

Daily digest market movers: Pound Sterling rises against US Dollar ahead of Trump's inauguration

• The Pound Sterling rebounds to near 1.2200 against the US Dollar (USD) in Monday's European Session. The GBP/USD pair rises as the safe-haven appeal of the US Dollar diminishes ahead of Trump's swearing-in ceremony for the Presidential charge. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, slumps to near 109.00.
• The broader outlook for the US Dollar remains firm as investors expect economic policies under Trump's administration to be pro-growth and inflationary for the US economy. According to a report from Fox Digital News, Trump is expected to sign over 200 orders on the first day of high return to the White House. His orders might include immigration controls, higher tariffs, and lower taxes.
• The US economic calendar has little to offer this week except for the S&P Global preliminary Purchasing Managers Index (PMI) data for January, which will be published on Friday. Until then, the Greenback will be influenced by market expectations for the Federal Reserve's (Fed) monetary policy outlook for the entire year.
• According to the CME FedWatch tool, traders are pricing in more than one 25 bps interest rate cut this year, seeing the first in the June meeting.

Technical Analysis: Pound Sterling ranges around 1.2200

The Pound Sterling trades higher around 1.2200 against the US Dollar on Monday but has been broadly sideways between 1.2100 and 1.2300 for a week. The outlook for the GBP/USD pair remains bearish as the 50-day EMA slopes downwards around 1.2538.

The 14-day Relative Strength Index (RSI) remains inside the 20.00-40.00 range, suggesting a strong bearish momentum.

Looking down, the pair is expected to find support near the October 2023 low of 1.2050. On the upside, the January 15 high of 1.2306 will act as key resistance.