Just when the pressure on sterling from rising yields appeared to have abated, market focus on spreads might be the next thing to trip up the pound. GBP/USD fell from Wednesday's UK and U.S. CPI-related highs above 1.23 to a session low of 1.2176 on Thursday after soft UK GDP, output data, and mixed U.S. retail sales and claims data tempered U.S. Treasury and gilt yield rises. Recent sterling weakness was exacerbated by fiscal uncertainties, as the rise in UK yields as part of the broader global Trump trade raised questions about the UK budget. Soft UK and U.S. CPI data, and Thursday's weak UK GDP and output data have increased the odds of BoE rate cuts in February and further out in 2025, relieving pressure on longer-term yields but not on the pound. Sterling's decline since the post-CPI high above 1.23 may reflect lower UK rates and a growing U.S. yield advantage, even as fiscal concerns take a back seat. Though the mini-budget-crisis that destroyed PM Liz Truss's government has been fresh in investors' minds through the recent bond market turmoil, finance minister Rachel Reeves fiscal outline is different, which may have prevented sterling and gilts from cratering, despite some weakness. But, if UK data continues to show waning inflation, sterling may still slide toward late-2023 lows of 1.20 and early March 2023 lows of 1.18. However, as the political component wanes, these moves are likely to be more orderly.

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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)

((paul.spirgel@thomsonreuters.com))