GBP/USD Outlook Amid Economic Uncertainty

The GBP/USD pair has been somewhat tentative during Friday’s Asian session, hovering just above the 1.3600 level. Traders seem to be holding back, waiting for the US consumer inflation data before making any strong moves.

The upcoming US Consumer Price Index (CPI) report will significantly impact expectations regarding the Federal Reserve’s (Fed) interest rate decisions. An increase in demand for the US dollar (USD) could subsequently affect the GBP/USD pair. Right now, the market is leaning toward the possibility that the US central bank will reduce interest rates at least twice by 2026, which has left USD buyers a bit cautious.

On another note, there are rising worries about the Fed’s independence which have hindered it from capitalizing on the positive momentum generated by a recent nonfarm payrolls (NFP) report. Even so, a risk-averse sentiment is lending some support to the safe-haven greenback, creating challenges for the GBP/USD pair. Additionally, soft expectations surrounding the Bank of England (BoE) have limited upside potential for the British pound (GBP).

Recent macroeconomic data from the UK was mostly underwhelming, raising speculation that the central bank might lower interest rates by 25 basis points as early as March. The economy saw a mere 0.1% growth in the last quarter of the year, matching a similar slow pace from the previous quarter and falling short of the BoE’s forecast of 0.2%. This suggests a need for further easing.

Meanwhile, British Prime Minister Keir Starmer has gained support from his Cabinet and Labour MPs after a turbulent period linked to the Jeffrey Epstein scandal and the departures of key aides. This stability appears to have mitigated immediate leadership challenges and reduced political uncertainty in the UK, which could provide a lift for the GBP and the GBP/USD pair. However, it might be wise to exercise some caution before predicting a significant downswing.