Pound Sterling consolidates against USD in holiday-curtailed week
- The Pound Sterling trades back-and-forth above 1.2500 as the trading volume is light amid holidays in global markets on account of Christmas Day.
- Fed policymakers see the fund rates heading to 3.9% by the end of 2025.
- Trades have fully priced in two interest rate cuts by the BoE next year.
The Pound Sterling (GBP) trades sideways above the psychological support of 1.2500 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair consolidates as trading volume is low amid a holiday-shortened week due to Christmas Eve and Boxing Day on Wednesday and Thursday, respectively.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, also trades sideways around 108.15.
More broadly, the Greenback remains on the front foot amid firm expectations that the Federal Reserve (Fed) will follow a more gradual interest rate cut approach for the next year. Fed policymakers see the central bank delivering fewer interest rate cuts than previously expected amid a slowdown in the disinflation process and uncertainty over the impact on the economy of incoming immigration, trade, and tax policies by President-elect Donald Trump.
The recent Fed dot plot showed that officials see the federal funds rate heading to 3.9% by the end of 2025, suggesting that there will be more than one interest rate cut next year. According to the CME FedWatch tool, traders are pricing in that the central bank will leave interest rates unchanged in the current range between 4.25% and 4.50% for January's policy meeting.
Looking at the US economic calendar for the rest of the week, Initial Jobless Claims for the week ending December 20, to be released on Thursday, is the only major economic indicator that could impact the US Dollar. The number of individuals claiming jobless benefits for the first time is estimated to come in at 218K, slightly lower than the former release of 220K.
Daily digest market movers: Pound Sterling rises against major peers
- The Pound Sterling trades higher against its major peers on Tuesday. The British currency gains as investors largely ignore a mild increase in Bank of England’s (BoE) dovish bets for the next year. Traders see a 53-basis points (bps) interest rate reduction in 2025, slightly up from 46 bps after the BoE policy announcement on Thursday.
- BoE dovish bets accelerated after three out of nine Monetary Policy Committee (MPC) members proposed reducing interest rates by 25 bps, more than the one projected by market participants. Investors considered the 6-3 vote split as a dovish buildup for the next year, which weighed heavily on the Pound Sterling.
- BoE Governor Andrew Bailey refrained from committing a pre-defined rate cut path after leaving rates unchanged in December. “Due to heightened uncertainty in the economy, we can't commit to when or by how much we will cut rates in 2025,” he said.
- Contrary to market expectations, analysts at Deutsche Bank expect the BoE to announce four interest-rate cuts next year, one coming in the first half and the rest in the second half.
Technical Analysis: Pound Sterling remains bearish on upward-sloping trendline breakdown
The Pound Sterling remains vulnerable against the US Dollar as it has decisively fallen below the upward-sloping trendline around 1.2600, which is plotted from the October 2023 low of 1.2035.
A death cross, represented by the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.2790, also suggests a strong bearish trend in the long run.
The 14-day Relative Strength Index (RSI) falls below 40.00. A fresh downside momentum could trigger if the oscillator sustains below that level.
Looking down, the pair is expected to find a cushion near the April 22 low around 1.2300. 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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