Sterling faces renewed pressure following higher-than-expected U.S. inflation data which boosted U.S. yields and with the BoE tipped to more dovish policy, the pound is likely to continue to adjust lower ahead of Thursday's GDP and output data, and next week's UK employment and CPI reports. With markets following Fed Chair Powell's no-rush easing outlook, widening U.S.-UK yield spreads should keep the dollar firm and cap GBP/USD near 1.25.

Stronger inflation data supports Powell’s, and other Fed members assertions that the Fed is in no rush to cut rates, pushing expectations for cuts into late 2025, from June-July to September-October. If Wednesday's data were to signal a trend, markets might begin contemplating a Fed hike, but that remains a remote possibility for now, with STIR futures

still discounting one more cut in this cycle before holding rates between 4-4.25% well into the future. On the sterling side of the GBP/USD equation, LSEG's IRPR predicts 2-more cuts in 2025, and 3-month Sonia futures are pricing UK rates sliding below 4% and holding there until 2030. This expectation of slightly diverging policy is likely to keep risks skewed to the downside as long as U.S. inflation persists. A close below the 30-DMA at 1.2375 would open the way for a test of the Feb. 3 low at 1.2249. More evidence of disappointing UK growth and inflation would make the the 2025 low from Jan. 13 at 1.21 vulnerable.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)