Pound Sterling ticks lower in quiet trading session on marginal rise in BoE dovish bets
- The Pound Sterling falls slightly against its major peers as market experts see more interest rate cuts by the BoE in 2025 compared to market pricing.
- Goldman Sachs sees the BoE reducing interest rates in each quarter of the next year.
- The US Dollar flattens in illiquid trading conditions before New Year celebrations.
The Pound Sterling (GBP) edges lower against its major peers in Monday’s London session. The British currency ticks lower, partly due to a mild increase in the Bank of England's (BoE) dovish bets for 2025.
Traders price in a 53-basis points (bps) interest rate reduction for the next year, up from the 46 bps estimated after the policy announcement on December 19, when the Bank of England (BoE) left borrowing rates unchanged at 4.75% with a 6-3 vote split. Before the policy announcement, market participants were anticipating that only one Monetary Policy Committee (MPC) would vote for a rate cut.
The BoE has been the slowest among European and North American nations to reduce interest rates this year. The BoE has reduced its key borrowing rates by 50 bps, while other peers such as the Federal Reserve (Fed) and the European Central Bank (ECB) pushed their borrowing rates lower by 100 bps. The Bank of Canada (BoC) and the Swiss National Bank (SNB) lowered interest rates by even more due to higher risks of inflation undershooting their respective targets.
"UK wage growth and services inflation have remained notably stickier than elsewhere, despite signs of material labor market rebalancing,” analysts at Goldman Sachs said in a note. “As a result, the BoE has been more cautious than other major central banks," they added. However, the investment banking firm expects continued quarterly cuts through 2025, more than what markets expect, as a “weaker labor market cools underlying inflation.”
Daily digest market movers: Pound Sterling edges lower against US Dollar
- The Pound Sterling struggles to hold Friday’s gains near 1.2580 against the US Dollar (USD) at the start of the week. However, low volatility is expected from the GBP/USD pair due to thin trading volume conditions before New Year celebrations. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades in a tight range of around 108.00, set to end the year with almost 6.7% gains.
- The USD performed strongly this year even though the Federal Reserve (Fed) reduced its key borrowing rates by 100 basis points (bps) to 4.25%-4.50%. The Greenback has gained significantly in the last three months after Republican Donald Trump’s victory in the United States (US) Presidential election as policies such as immigration control, higher import tariffs and lower taxes are expected to be inflationary and pro-growth.
- The Fed has also signaled fewer interest rate cuts in 2025 amid strong economic growth prospects, a slowdown in the disinflation trend, and better labor market conditions than previously forecasted. However, Fed Chair Jerome Powell refrained from guiding the likely impact of Trump’s policies on the economy.
- "It is very premature to make any kind of conclusions,” Powell said on December 18. “We don’t know what will be tariffed, from what countries, for how long, in what size," he added.
- This week, the major trigger for the Pound Sterling and the US Dollar will be final estimates for S&P Global and the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for December.
Technical Analysis: Pound Sterling consolidates below 1.2600
The Pound Sterling trades broadly sideways against the US Dollar below 1.2600 on Monday. The outlook of the GBP/USD pair remains vulnerable as it trades below the upward-sloping trendline around 1.2600, which is plotted from the October 2023 low of 1.2035.
All short-to-long-term Exponential Moving Averages (EMAs) are sloping down, suggesting a strong bearish trend in the long run.
The 14-day Relative Strength Index (RSI) hovers around 40.00. A fresh downside momentum could trigger if the oscillator sustains below this level.
Looking down, the pair is expected to find a cushion near the April 22 low at around 1.2300 if it breaks below the immediate support of 1.2485. On the upside, the December 17 high at 1.2730 will act as key resistance.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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