The GBP/USD currency pair is experiencing downward pressure as UK Gilt yields decline following the release of lower-than-anticipated inflation figures from the United Kingdom. The yield on the UK 10-year Gilt fell to 4.73%, retreating from recent multi-decade highs. Meanwhile, the US Dollar weakened after the release of softer consumer price index (CPI) data for December. As a result, GBP/USD is trading around 1.2220 during early Thursday trading, which reflects a pullback after two days of gains.
The significant drop in the Gilt yield was prompted by official statistics revealing an unexpected decrease in headline UK inflation, which has raised expectations for potential interest rate cuts by the Bank of England. The UK CPI increased by 2.5% year-over-year in December, a reduction from November’s 2.6% and below the forecasted 2.7%. This figure, although lower, remains above the Bank of England’s target of 2%.
In addition to the overall CPI decline, core inflation, which omits the more volatile categories of food and energy, also fell, registering a 3.2% increase in December from 3.5% in November. This was lower than the anticipated 3.4%. Services inflation showed a notable drop, falling to 4.4% year-over-year from 5% in the previous month.
On the other hand, USD also depreciated on the back of softer US CPI data, which ignited speculation regarding two potential interest rate cuts by the US Federal Reserve in the upcoming year. The US CPI for December rose by 2.9% year-over-year, consistent with market expectations, while core CPI increased by 3.2%, slightly trailing previous figures and forecasts. The US Dollar Index is currently hovering around 109.00, while 2-year and 10-year Treasury bond yields are recorded at 4.27% and 4.66%, respectively. Both yields witnessed a decline exceeding 2% as the softer inflation data stirred hopes that the Federal Reserve may continue its easing measures.
