In a week marked by significant monetary policy shifts, both the European Central Bank and the Swiss National Bank decided to lower interest rates, while the Bank of England appears hesitant to follow suit due to persistent services inflation in the UK. This reluctance to cut rates could lead to a depreciation of the pound, especially with expectations of a more aggressive easing strategy emerging by spring 2025. Should the US dollar continue to strengthen, it may exert further downward pressure on the GBP/USD exchange rate. Investors are bracing for potential market volatility in 2024, as the Federal Reserve, Bank of Japan, and BoE prepare to make critical decisions regarding their monetary policies for the upcoming year. The outlook for GBP/USD remains bearish.
UK PMI Reports Highlight Economic Struggles
The UK's Composite PMI recorded no growth in December, reflecting the deepening challenges in the economy. Notably, the private sector employment faced its sharpest drop in almost four years. While the services PMI nudged higher to 51.4 from 50.4—surpassing expectations—the manufacturing PMI fell to an 11-month low of 47.3, down from 48.0 in November. Similar trends were observed in the Eurozone, where services PMI grew stronger than anticipated, while manufacturing contracted more than expected.
In the UK, new orders declined for the first time in over a year, highlighting weakening business and consumer spending, as reported by S&P Global. This decline stems from sustained inflationary pressures unique to the UK, which complicate the BoE's potential rate cut discussions.
The report indicated, “Rising salary payments and heightened domestic inflationary pressures continued to inflate cost burdens across the private sector in December… the rate of input price inflation intensified for the second consecutive month, reaching its peak since April. Manufacturers reported the steepest rise in purchasing prices since January 2023.”
The latest PMI figures followed a disappointing UK growth report, which contributed to the GBP/USD slipping towards the 1.26 mark, while the EUR/GBP recovery saw it rising back above 0.83, closing the week positively. This rebound had an effect on the EUR/USD, which moved back up to $1.05 ahead of a busy central bank week.
US Dollar Stability Amid Potential FOMC Rate Cut
Last week’s US CPI data yielded no surprises; however, the stronger-than-expected PPI caught the attention of traders. Market expectations for a Federal Reserve rate cut at its next meeting are growing, with a 25-basis-point reduction now largely anticipated. The Fed is faced with a delicate balance—any significant deviation from this path could lead to notable disruptions in the market.
Jerome Powell’s statements last month—highlighting reduced risks to the labor market alongside persistent inflation—have intensified speculation surrounding a cautious approach to rate cuts. Powell's comments during the upcoming press conference and the Fed's latest economic projections are likely to play a critical role in shaping market sentiment.
Considering the current landscape, it is expected that the Fed will implement a hawkish cut. Anticipated policy initiatives from President-elect Trump—focusing on immigration, tariffs, and tax reforms—could steer the Fed towards a more measured easing strategy through 2025. This is likely to provide robust support for the dollar and contribute to the bearish forecast for GBP/USD.
Upcoming Week: Potential Influences on GBP/USD Forecast
As the week unfolds, key monetary policy announcements are anticipated from the US Federal Reserve (Wednesday) and both the Bank of England and Bank of Japan (Thursday). For the GBP/USD trajectory, the rate statements and insights from the central banks will be critical.
Prior to the Bank of England’s rate decision, traders will have absorbed insights from the Fed and BoJ, both of which are expected to announce rate cuts. While the ECB cut rates by 25 basis points last week and the SNB surprised analysts with a 50 basis point reduction, the BoE may opt to hold rates steady despite frail macroeconomic data.
GBP/USD Technical Overview
Technically, the GBP/USD outlook has turned bearish after facing resistance around the 1.28 mark last week. Short-term resistance now lies in the 1.2715/20 range, a significant threshold after breaking beneath it recently. This breach opens the possibility of a drop below the 1.2600 zone, with the psychologically important 1.25 level coming into sharper focus, previously acting as support after a dip to November's low of 1.2487.
For the time being, major resistance above the 1.2715/20 zone centers around the 1.2800–1.2870 area. This level has historical significance as both resistance and support and aligns with the 200-day moving average, making it pivotal for any potential GBP recovery in the upcoming week.
