GBP/USD tumbled on Wednesday testing big-figure support at 1.20 after hot U.S. retail sales further validated higher Fed rate expectations, leaving a defensive outlook for the pound.

The U.S. numbers added pressure to sterling after UK CPI data hinted that inflation is beginning to fall, raising dovish BoE risks.

Diverging UK-U.S.
rate trajectories are likely to keep downward pressure on GBP/USD in 2023.
Relative rate probabilities as seen on IRPR on Eikon indicate the BoE is expected to hike rates 48bp by the September meeting, while the Fed is seen hiking 69bp by July.

Diminishing expectation for a Fed rate pivot lower in 2023 added to dollar strength.
Fed fund futures are now pricing a 13bp cut from the perceived Fed peak in July to the December meeting, essentially a coin-toss where recently two cuts were price in for 2023.

While UK and U.S. inflation and hike outlooks remain fluid, with both the BoE and Fed remaining data dependent, under current conditions, and until rates begin to converge, the pound should remain on the backfoot versus the dollar and other higher rate currencies.

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