This morning's GDP data unveiled that the UK experienced a technical recession last year, with the fourth-quarter figure registering at minus 0.3%, falling below expectations. GBP/USD is currently trading in the mid-$1.25 range and is contending with its 200-day moving average. In the event that this crucial support level falters, our attention turns to the 100-day moving average at $1.25 as the next short-term downside target.

All three major sectors of the UK economy contracted from October through December. The services sector, constituting approximately three-quarters of the economy, saw a decline of 0.2%. Production, encompassing manufacturing, suffered a 1% drop in output, while construction contracted by 1.3%. Although the economy has contracted for two consecutive quarters, the GDP estimate for 2023 indicates a 0.1% increase compared to 2022.

For the Bank of England (BoE), the result has minimal impact on the interest rate outlook. Of greater significance, recent data revealed lower-than-expected UK inflation in January, with declining costs of food and household goods fostering expectations that inflation could approach the BoE's target by summer. The pound experienced widespread daily declines as traders anticipated more pronounced and earlier interest-rate cuts. The current market outlook suggests the BoE will implement just over 70 basis points of cuts this year, up from 61 basis points at Tuesday's close following stronger-than-expected wage growth figures.

Despite the short-term prospects for sterling appearing potentially weaker, we maintain the view that 2024 could witness a modest recovery against the US dollar and euro. This optimism is primarily rooted in the higher UK interest rate outlook, with expectations of fewer rate cuts by the BoE compared to the Fed and ECB.