Pound Sterling weakens at the start of new year amid firm BoE rate cut prospects
- The Pound Sterling trades weakly against its major peers as analysts at Goldman Sachs expect the BoE to deliver four interest rate cuts this year.
- The US Dollar trades close to a fresh two-year high as the Fed is expected to reduce interest rates less than previously anticipated this year.
- Investors await an array of US labor market data on Thursday for fresh Fed policy guidance.
The Pound Sterling (GBP) weakens against its major peers on Thursday amid growing expectations that the Bank of England (BoE) will follow a less gradual rate-cut approach this year.
The BoE reduced its key borrowing rates by 50 basis points (bps) to 4.75% in 2024. BoE’s policy-easing pace was slow compared to its European and North American peers as inflation in the United Kingdom (UK) service sector remained highly stubborn due to sticky wage growth.
However, a slightly faster rate-cut pace is expected this year, as a slowdown in labor demand would tame price pressures. In a note this week, analysts at Goldman Sachs said that the BoE will cut interest rates each quarter through the year. This indicates that the BoE policy rate will decline to 3.75% by the year-end.
Daily digest market movers: Pound Sterling edges lower against US Dollar
- The Pound Sterling trades cautiously near the psychological support of 1.2500 against the US Dollar (USD) at the start of the year. The GBP/USD pair ticks lower in Thursday’s European session and is expected to face more selling pressure ahead as the US Dollar Index (DXY) trades close to a more-than-two-year high at around 108.50.
- The greenback is expected to strengthen as investors expect incoming policies from President-elect Donald Trump to boost economic growth and inflationary pressures in the United States (US). This scenario will compel the Federal Reserve (Fed) to slow the pace of rate cuts, which will be favorable for the US Dollar and US Treasury yields.
- Meanwhile, Fed officials have already recommended fewer interest rate cuts this year. However, Fed Chair Jerome Powell refrains from predicting the likely impact of Trump’s policies, such as immigration controls, higher import tariffs, and lower taxes, on the economy.
- The latest dot plot at the Fed's Summary of Economic Projections showed that policymakers collectively see Federal Fund rates heading to 3.9% by the end of 2025, higher than the 3.4% forecasted in September.
- Going forward, investors will pay close attention to a slew of US labor market-related economic indicators, which will be released next week. Signs of improving labor demand would further weigh on Fed rate cut prospects, while weak numbers would boost them.
- But before that, investors will focus on the ISM Manufacturing Purchasing Managers Index (PMI) data for December, which is scheduled for Friday. The Manufacturing PMI is expected to come in at 48.3, slightly lower than the 48.4 in November.
Technical Analysis: Pound Sterling struggles around 1.2500
The Pound Sterling struggles to hold the key support of 1.2500 against the US Dollar and holds near the seven-month lows on Thursday. 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) falls below 40.00, signaling that a fresh downside momentum could trigger if the oscillator sustains below this level.
Looking down, if the pair breaks below the immediate support of 1.2485, it is expected to find a cushion near the April 22 low at 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.