GBP/USD edges lower to near 1.2200 as UK Gilt yields drop

• GBP/USD faces pressure as UK Gilt yields decline following lower-than-expected UK inflation.
• The yield on the UK 10-year Gilt dropped to 4.73%, pulling back from multi-decade highs.
• The US Dollar depreciated following the softer US Consumer Price Index inflation data for December.

GBP/USD edges lower after two days of gains, trading around 1.2220 during the Asian hours on Thursday. The Pound Sterling (GBP) receives downward pressure following lower-than-expected inflation data from the United Kingdom (UK) released on Wednesday.

The yield on the UK 10-year Gilt fell to 4.73%, retreating from multi-decade highs, after official data showed an unexpected drop in headline UK inflation, increasing expectations of rate cuts by the Bank of England (BoE).

The UK Consumer Price Index (CPI) increased by 2.5% year-over-year in December, down from 2.6% in November and below the market forecast of 2.7%. Despite the slowdown, the figure remained above the Bank of England’s (BoE) 2% target.

Meanwhile, the annual core CPI, which excludes volatile food and energy items, grew by 3.2% in December, compared to a 3.5% increase in November, missing market expectations of 3.4%. Additionally, services inflation declined sharply to 4.4% year-over-year in December, down from 5% in November.

However, the GBP/USD pair gained ground as the US Dollar (USD) extended its decline following the cooler-than-expected US Consumer Price Index (CPI) inflation data for December, which heightened speculation that the US Federal Reserve (Fed) could implement two interest rate cuts this year.

The US CPI rose by 2.9% year-over-year in December, up from 2.7% in November, matching market expectations. On a monthly basis, CPI increased by 0.4%, following a 0.3% rise in November. US Core CPI, excluding volatile food and energy prices, increased by 3.2% annually in December, slightly below both the previous month's 3.3% and analysts' forecast of 3.3%. On a monthly basis, core CPI edged up by 0.2% in December 2024.

The US Dollar Index (DXY), which gauges the US Dollar's performance against six major currencies, is trading near 109.00. Meanwhile, 2-year and 10-year US Treasury bond yields are at 4.27% and 4.66%, respectively. Both yields dropped by over 2% on Wednesday as softer US core CPI data fueled expectations that the Federal Reserve’s easing cycle may continue.