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27 Dec 2024
Pound Sterling trades subdued as markets asses more dovish BoE policy outlook
- The Pound Sterling weakens slightly as investors expect the BoE to follow a less gradual policy easing cycle in 2025 than previously anticipated.
- Traders project at least two BoE interest rate cuts of 25 bps next year.
- US Initial Jobless Claims surprisingly fell to 219K last week.
The Pound Sterling (GBP) registers minor losses against its major peers on Friday, with investors looking for fresh cues about how the Bank of England (BoE) will follow the interest rate cut path in 2025. The latest BoE policy announcement in mid-December indicated a dovish buildup as the nine Monetary Policy Committee (MPC) voted 6-3 to keep interest rates on hold, a bigger split than the 8-1 economists had predicted.
A higher number of BoE officials voting for an interest rate cut has led traders to gradually raise dovish bets for 2025. Markets currently see a 53-basis points (bps) reduction in interest rates in 2025, up from 46 bps after the BoE policy announcement on December 19, suggesting that there will be at least two meetings in which officials will reduce key borrowing rates by 25 bps.
Meanwhile, BoE Governor Andrew Bailey has not guided a specific policy easing path for 2025, citing heightened uncertainty in the United Kingdom (UK) economy.
Daily digest market movers: Pound Sterling trades in tight range against US Dollar
- The Pound Sterling oscillates in a tight range above the psychological support of 1.2500 against the US Dollar on Friday amid thin trading volume following Christmas and Boxing Day. The GBP/USD pair is expected to continue trading sideways as the activity will likely remain muted. However, any price action could be on the bearish side as investors remain confident that the Federal Reserve (Fed) will deliver fewer interest rate cuts in 2025, supporting the USD. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles around 108.00.
- Fed officials have collectively forecasted that the Federal fund rate will be at 3.9% by the end of 2025, suggesting that there will be two interest rate cuts next year against the four cuts projected in September. The Fed has turned cautious on interest rate cuts as the growth outlook is positive and the labor market is holding up.
- Initial Jobless Claims for the week ending December 20 have also come in lower than expected. Individuals claiming jobless benefits for the first time surprisingly fell to 219K from the former release of 220K. Economists expected the number of jobless claims to come in higher at 224K.
- Additionally, inflationary pressures have turned out stubborn in the past few months. This scenario has renewed fears of price pressures remaining persistent.
- Going forward, the major trigger for the US Dollar will be revised estimates for S&P Global and ISM Manufacturing Purchasing Managers’ Index (PMI) data for December, which will be released next week.
Technical Analysis: Pound Sterling remains weak on declining short-to-long-term EMAs
The Pound Sterling remains vulnerable against the US Dollar after a breakdown 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) falls below 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.