The Pound Sterling (GBP) has dropped to near 1.2550 after failing to extend its intraday high of 1.2600 and has turned negative against the US Dollar (USD) in Monday’s North American session. This decline comes as the US Dollar bounces back in thin trading volume conditions before New Year celebrations. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, has risen to near 108.30 and is set to end the year with almost 6.7% gains.
US Dollar’s Performance This Year
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%. It has gained significantly in the last three months after Republican Donald Trump’s victory in the US Presidential election. Policies like immigration control, higher import tariffs, and lower taxes are expected to be inflationary and pro-growth, which has boosted the US Dollar.
Fed’s Interest Rate Outlook
The Fed has signaled fewer interest rate cuts in 2025 due to 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, saying it’s very premature to make any conclusions as they don’t know details about tariffs and other aspects.
Key Trigger for Currencies This Week
This week, the major trigger for the Pound Sterling and the US Dollar will be the final estimates for the December S&P Global and US ISM Manufacturing Purchasing Managers’ Index (PMI) data.
Pound Sterling Under Pressure from Interest Rate Expectations
Market Bets on BoE Rate Cuts
The Pound Sterling faces pressure against its major peers on Monday. There’s been a mild increase in the Bank of England’s (BoE) dovish bets for 2025. Traders now 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. On that day, 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 only one Monetary Policy Committee (MPC) member would vote for a rate cut.
BoE’s Rate Cut Comparison with Peers
The BoE has been the slowest among European and North American nations to reduce interest rates this year. It has reduced its key borrowing rates by 50 bps, while other peers like 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. Analysts at Goldman Sachs noted that UK wage growth and services inflation have remained stickier than elsewhere despite labor market rebalancing, and as a result, the BoE has been more cautious. But the firm expects continued quarterly cuts through 2025, more than what markets expect, as a weaker labor market cools underlying inflation.
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