The pound sterling traded higher this morning, gaining some strength against the US dollar since the start of Asian trading. With economic data out this morning, it rose to 1.2660, supported by a slight improvement in the services PMI. Despite these gains, the GBP/USD pair has returned to a level below 0.83.
In terms of daily movements, the GBP/USD pair has recovered some of its losses from last week, but current price action suggests that there could be a pause in the gains at the 1.26 level. This point could limit any further recovery in the near term.
Despite some mixed economic data released last Friday, such as October’s GDP, as well as December’s PMIs coming in below expectations, expectations for any changes in the Bank of England’s interest rate policy this week remain slim. According to Shaun Osborne, chief foreign exchange strategist at Scotiabank, markets have priced in only a modest 2bp rate cut from the Bank of England at its meeting next Thursday.
The GBP/USD exchange rate is likely to experience a limited recovery in the coming days, but traders should not confuse these short-term moves with real strength in the currency. The overall trend in GBP/USD remains bearish, despite a pause in the trend in December. The current month is in line with a strong seasonal signal that the US dollar is weakening during it.
A real recovery in sterling will depend on a range of economic events this week, including central bank decisions, inflation data and the labor market, which could help determine future trends.
Investment bank forecasts for the GBP/USD pair
Investment bank forecasts indicate the possibility of a rise in the pound sterling against the US dollar in the near future, but this rise may face major challenges that may limit its sustainability. Economic reports have shown a marked slowdown in UK economic growth since the first half of the year, which could hamper the pound’s progress against the dollar. Several negative factors contribute to these challenges, including falling consumer confidence, tightening government budgets, and cutting unnecessary spending by businesses, which has a negative impact on economic activity.
Despite these challenges, the pound has seen a slight rise in recent days, supported by the UK’s services purchasing managers’ index for December, which showed a slight improvement in economic performance. The index rose to 51.4 from 50.8 in November, beating expectations of 50.9. However, the UK’s labor sector remains a concern, with a report indicating a significant decline in employment at the fastest pace since the global financial crisis in 2009, excluding the pandemic.
Part of this decline is due to the introduction of a new jobs tax by the Labor government in October. Many analysts expect 2025 to be a crucial year for the pound, with official data from the Office for National Statistics likely to reveal the state of the UK labor market, which will have a significant impact on the strength of the pound. Meanwhile, next Wednesday will be an important test for the GBP/USD pair, with the UK inflation report due out alongside the US Federal Reserve decision. Under these circumstances, the US dollar is expected to stay strong, reinforcing expectations of a short-term decline in the pound. The pair is likely to return to its November 22 low of 1.2486 by the start of 2025.
Impact of inflation and interest rate expectations on the Pound sterling and the USD
Inflation in the United Kingdom is expected to rise to 3.0%, which puts it far from the Bank of England’s target of 2.0%. This rise in inflation could pose a major challenge to the British central bank in its attempts to control prices. In contrast, the US Federal Reserve plans to cut interest rates by 25 basis points, which will contribute to strengthening the US dollar significantly. This trend reflects the bank’s response to a set of economic data that may affect it in the near future.
Expectations for the GBP/USD pair are rising due to these changes, as the investment bank has issued new forecasts for the period until the end of 2024 and 2025, showing a significant increase in expectations for the pair. However, the biggest challenge lies in how markets will respond to the upcoming forecasts, as the Fed will also release new projections indicating the number of cuts possible in 2025. Although the market has already lowered expectations for these cuts, it is difficult to see the Fed providing guidance that lowers expectations further, which could pose an additional challenge to the US dollar.
This stance opens the door to more volatility in the movement of the GBP/USD, as the pair sees strong movements based on economic developments. Meanwhile, the biggest challenge for the pound is expected to come next Thursday, when the Bank of England announces its decision on interest rates. Interest rates are likely to remain unchanged, but the vote of the bank’s members on the decision could have a significant impact on the markets, especially if a number of them vote in favor of a rate cut.
