Sterling sliding, Fed worried about Trump

The British pound is on a nasty slide and has lost 1.8% since Monday. In the European session, GBP/USD is currently trading at 1.2294, down 0.53%. Earlier, the pound fell as low as 1.2237 (1%), it lowest level since Nov. 2023.

BRC shop inflation hits 3.5 year low

The latest setback for the pound was Thursday’s British Retail Consortium (BRC) Shop Price index, which came in at -1% in December, lower than the November reading of -0.4% and the market estimate of -0.6%. This was the lowest level since July 2021. This points to weaker consumer spending, a key engine of the economy.

The BRC has projected that food inflation will continue to accelerate, which will add to the squeeze that weary consumers are feeling from inflation and high interest rates. The UK government introduced a “tax  and spend” budget last October but retailers have argued that this recipe will lead to retail job cuts and higher prices.

Fed minutes point to Trump worries

The Federal Reserve minutes of the December meeting, released on Wednesday, indicated that policy makers were concerned about the upside risk to inflation, particularly due to incoming President-elect Trump’s potential trade and immigration policies. Trump has promised to slap punishing tariffs on US trade partners, including China. Trump has also called for mass deportations of illegal immigrants.

The minutes did not mention Trump by name but there was no doubt that Fed members had Trump in mind. Members noted their concern that inflation could rise due to “the likely effects of potential changes in trade and immigration policy”.

Members also indicated that the Fed was “at or near the point” of slowing the pace of easing. After starting the easing cycle with a jumbo rate cut of 50 basis points, the Fed has delivered back-to-back cuts of 25 basis points. At the December meeting, the Fed lowered its rate forecast for 2025 to two cuts, down from four in the September forecast.

After the December meeting, the currency markets reacted sharply to the revised forecast and the US dollar shot up against the majors. The Fed again sounded hawkish in the minutes but this time the US dollar showed little movement against the majors, with the exception of GBP/USD.

GBP/USD technical

• GBP/USD is testing support at 1.2292. Below, there is support at 1.2220.

• 1.2393 and 1.2465 are the next resistance lines.