GBP/USD price 3% January drop nears 15-month low as UK economy struggles
The pair extended its decline to 1.2120
The British Pound (GBP) has been under significant pressure in January, declining over 3% against the US Dollar (USD) within just 13 days.
With the pair approaching a critical 15-month low, a range of factors, from domestic economic concerns in the UK to stronger US economic data, suggest the path of least resistance for GBP/USD remains to the downside.
Since the start of the year, GBP/USD has struggled, experiencing four consecutive bearish days last week, as the pair drops near the 1.2100 psychological level, a low not seen since November 2023. In today’s Asian session, the pair extended its decline to 1.2120, but it is noteworthy that the Relative Strength Index (RSI) on the 4-hour, daily, and weekly timeframes shows deeply oversold conditions. This suggests that while bearish momentum is strong, a short-term relief could offer temporary reprieve for GBP/USD.
GBP/USD price dynamics (March 2023-January 2025). Source: TradingView
GBP/USD outlook: Inflation and stagnation weigh on the cable
However, the outlook for GBP remains fraught with challenges grappling the UK economy such as persistent inflation and stagnating growth. These issues continue to weigh on the GBP as the market questions the Bank of England’s ability to respond effectively. On the other hand, the USD has benefited from strong economic data, particularly the December Nonfarm Payrolls (NFP) report, which showed the US economy added 256,000 jobs, surpassing expectations. This report, coupled with a drop in the US unemployment rate to 4.1%, reinforces expectations for a hawkish Federal Reserve, which is likely to continue supporting the USD.
If GBP/USD fails to continue the short term relief, the pair may extend its decline and test new lows below the 1.2100 psychological level resulting in a plausible fifth consecutive bearish day. Further developments in the UK economy and US economic data will continue to dictate the near-term direction for GBP/USD.
Concerns over the UK's fiscal and inflationary outlook waned investor sentiment on the pound, leading to capital flight. This led GBP/USD to a 14-month low of 1.2238 on Thursday.
