The Pound Sterling has shown some resilience against its major counterparts despite expectations of further interest rate cuts by the Bank of England (BoE) in 2025 compared to market pricing. Goldman Sachs predicts that the BoE will reduce interest rates in each quarter of the next year. Meanwhile, the US Dollar has remained relatively flat in illiquid trading conditions ahead of New Year celebrations, with the US Dollar Index (DXY) set to end the year with gains of almost 6.7%.
The USD has performed strongly this year despite the Federal Reserve reducing key borrowing rates by 100 basis points to 4.25%-4.50%. This surge in the Greenback can be attributed to the pro-growth and inflationary policies expected under President Donald Trump’s administration. The Fed has indicated fewer interest rate cuts in 2025 due to strong economic growth prospects, a slowdown in disinflation trends, and better labor market conditions. Fed Chair Jerome Powell, however, remains cautious in predicting the impact of Trump’s policies on the economy.
This week, market movers for the Pound Sterling and the US Dollar include final estimates for S&P Global and the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for December.
Despite a slight rise in dovish bets for the BoE in 2025, the Pound Sterling has managed to rebound against its major peers. Market participants are now pricing in a 53-basis points interest rate reduction for the next year, up from the initial 46 bps estimate. The BoE’s cautious approach to interest rate cuts compared to other central banks can be attributed to stickier wage growth and services inflation. Goldman Sachs expects continued quarterly cuts through 2025, more than what markets anticipate, as a weaker labor market cools underlying inflation.
On the technical analysis front, the Pound Sterling is broadly trading sideways near 1.2600 against the US Dollar. The outlook for the GBP/USD pair remains vulnerable as it trades below an upward-sloping trendline around 1.2600. Short-to-long-term Exponential Moving Averages (EMAs) are sloping down, indicating a strong bearish trend in the long run. The 14-day Relative Strength Index (RSI) hovers around 40.00, suggesting a potential downside momentum. Immediate support for the pair is seen at 1.2485, with a further cushion expected near the April 22 low at around 1.2300. Key resistance lies at the December 17 high of 1.2730.
In conclusion, while the Pound Sterling has managed to rebound slightly against its major peers, concerns over further interest rate cuts by the BoE in 2025 still linger. On the other hand, the US Dollar continues to show strength, backed by expectations of pro-growth policies under the Trump administration. Technical analysis suggests a vulnerable outlook for the GBP/USD pair, with immediate support levels to watch. The coming week will bring more market-moving data that could further impact the Pound Sterling and the US Dollar.
