The GBP/USD pair has been in a steep downtrend this week, dropping more than 300 points in just a few days. Yesterday, GBP/USD bears pushed the price to a 14-month low of 1.2237, marking the first test of 1.22 since November 2023. Notably, the instrument sank sharply even though the US dollar index weakened, indicating that GBP/USD's downward movement is driven not only by dollar strength but also by the sapped British pound.

The pound sterling is losing ground amid a sell-off in UK government bonds. The yield on 10-year gilts has risen to its highest level since 2008, while 30-year bond yields have reached a 27-year high. Bond prices, which inversely correlate with yields, are falling in sync with the pound.

Key drivers of GBP's decline

The pound's weakness stems from deteriorating fiscal forecasts, sluggish UK economic growth, and persistently high inflation.

According to the latest inflation report, the UK's CPI rose to 2.6% year-on-year in November, the fastest pace since March of last year. Core inflation climbed to 3.5%, marking the second consecutive month of growth. The Retail Price Index also accelerated to 3.6%, the highest level since July 2024.

Economic growth in the UK has effectively stalled. Revised data from late December showed that GDP growth in Q3 2024 remained flat quarter-on-quarter, missing the forecast of a 0.2% increase. This reflects a clear downtrend: GDP grew by 0.7% in Q1, 0.5% in Q2, and 0.0% in Q3. The British economy expanded by just 0.9% year-on-year, down from the earlier estimate of 1.0%.

According to a recent Deutsche Bank report, the UK economy faces a potential contraction in Q4 2024, with forecasting models suggesting a 0.1% quarter-on-quarter decline.

Market concerns and political turmoil

High borrowing costs have raised serious concerns among market participants about the UK's financial situation, leading to further devaluation of the pound. Typically, higher bond yields support the currency, but this correlation has broken down due to serious market worries about the country's economic prospects.

The Financial Times reports that the UK Treasury may need to borrow an additional £10 billion by the end of the fiscal year (March 2025) to meet its debt plans. Analysts fear this limit could be exceeded, forcing the government to either increase taxes or cut spending—measures that could further slow economic growth.

Adding to the pound's woes is the so-called "Trump effect." Allies of Donald Trump have been fiercely critical of UK Prime Minister Keir Starmer, with Elon Musk leading the charge. Musk has publicly accused Starmer of covering up violent crimes during his tenure as head of the Crown Prosecution Service (2008–2013). According to Financial Times insiders, Musk is also privately discussing the possibility of Starmer's removal with far-right allies in the UK before the next general election.

Outlook for GBP/USD

Under these circumstances, the pound is struggling to find a foothold, and any sustained recovery in GBP/USD, even as a correction, is likely only if the US dollar weakens. Meanwhile, the dollar is awaiting December NonFarm Payrolls. Preliminary forecasts suggest that US unemployment will remain at 4.2%. The US economy is expected to add 164,000 jobs in December. Average hourly earnings are projected to hold steady at 4.0%. Even if these figures meet expectations, the US dollar is likely to gain support, given the weak ADP employment report (122,000 jobs).

Technical analysis

The GBP/USD pair impulsively broke through the 1.2280 support level (the lower line of the Bollinger Bands on the D1 timeframe) but failed to consolidate below this target. The price remains between the middle and lower Bollinger Bands levels and below all Ichimoku indicator, which signal a bearish Line Parade.

We could use corrective pullbacks to open short positions with an initial target of 1.2280 (the aforementioned support level) and a secondary target of 1.2240 (the lower Bollinger Bands line on the W1 timeframe).