The pound sterling (GBP) remains under pressure near the 1.2600 level against the US dollar (USD) at the start of the US trading session on Monday. The GBP/USD pair is struggling to make gains as the US dollar continues to record a strong performance near its highest levels in more than a year. The US dollar index (DXY) is hovering around 107.00, reflecting relative stability for the US currency.
The US dollar is relatively stable, with investors expecting the Federal Reserve to follow a gradual approach to cutting interest rates, amid a partial recovery in inflation and economic growth, in addition to optimism about President-elect Donald Trump’s ability to implement his economic agenda smoothly.
The forecast indicates a 62% chance of the Fed cutting interest rates by 25 basis points at its December meeting, bringing the range to 4.25%-4.50%. However, this is down from around 77% a month ago.
Trump’s election victory has also prompted analysts to reassess their expectations for interest rates next year. “Trump’s policies could create inflationary pressures, as tariffs are passed on to consumers, while lower taxes help stimulate the economy,” said Quilter Investors analysts. They added that investors will be awaiting comments from Fed officials to see how Trump’s policies will affect the future path of interest rates.
On the other hand, Fed officials declined to comment on the impact of Trump’s policies on monetary policy, with Fed Chairman Jerome Powell saying on Thursday that “it is too early to draw conclusions about the impact of Trump’s policies.”
In terms of economic data, investors are awaiting the release of the preliminary global Purchasing Managers’ Index (PMI) for November on Friday, which could provide fresh clues on global economic trends.
Daily Market Brief: Pound sterling Under Pressure as Markets Await Turnaround
The pound sterling remained under pressure against the US dollar, as markets continue to monitor developments in the second Trump administration. However, some relief is expected this week. The GBP/USD pair has reached oversold levels, according to the Relative Strength Index (RSI), which showed a reading of 30. This reading indicates that the pound sterling may have been oversold, meaning that there is a strong possibility of a trend reversal. This could involve either a period of consolidation or a temporary recovery.
These oversold conditions, combined with expectations that markets may need a breather after the Trump administration-related rally, suggest that the pound could post modest gains this week. However, there are other factors that could influence the pound’s movements, such as the decline in UK GDP, which increases the likelihood of a Bank of England interest rate cut in the near future. BBVA analysts also believe that continued disappointment in UK economic data could prompt the bank to take steps to stimulate economic growth.
On the other hand, concerns are growing about economic uncertainty in the UK, as the government appears to be in an awkward position between strengthening its trade relations with the European Union or the United States. In this context, statements by Stephen Moore, senior economic adviser to US President Donald Trump, have raised questions about the future of economic relations between the UK and the US.
In this context, the Governor of the Bank of England, Andrew Bailey, expressed the need to rebuild relations with the European Union, which could put the UK in a difficult economic position. Therefore, investors will pay special attention to the UK Consumer Price Index data for October, which will be announced on Wednesday.
Analysis of the decline of the Pound sterling against the US dollar
The GBP/USD pair has been declining continuously for seven weeks, reflecting a clear shift towards the negative. Last week, the pair fell below its 200-day moving average, which is an official technical signal that the trend has turned from bullish to bearish in the long term.
The sharp decline in the pair signals a shift in market expectations regarding the US Federal Reserve’s policy. It has become clear that the Fed will not cut interest rates as much as analysts expected last summer. This adjustment in expectations strengthens the US dollar against other currencies. In this context, the US economy continues to outperform most major economies, which increases the likelihood of inflation remaining above the 2% target for a long time, which increases support for the dollar.
The role of US President Donald Trump’s economic policies in this context is a major factor, as the current administration seeks to boost growth through higher tariffs and tax cuts. Controversial appointments to his executive team also indicate a desire to accelerate economic measures significantly compared to his first term. Market reaction to the US election reflects expectations for this ambitious economic agenda.
However, the risk is that the market may overshoot initial expectations, leaving investors needing to see concrete data confirming the planned economic policies before their actual impact becomes clear. In the absence of such data, the US dollar remains open for an unsustainable rebound.
The risks of the upcoming events center on the release of UK inflation data on Wednesday. Analysts expect UK inflation to rise to 2.2% year-on-year in October, up from 1.7% in September. This increase could indicate a faster pace of inflation in the country.
UK Economic Outlook 2024: Inflation and Interest Rate Decisions
Following the October Budget, economists at the Bank of England and the Office for Budget Responsibility have updated their near-term economic forecasts, noting that the government has announced a significant increase in spending. With household energy prices rising again, the easier part of the economic downturn in 2024 is likely to be over.
Core inflation is forecast to remain steady at 3.2%, driven by higher service sector inflation. If the figures are weaker than expected, sterling could come under pressure, opening the door to a Bank of England rate cut in December.
Sam Hill, head of market insights at Lloyds Bank, expects service sector inflation to remain near 5% year-on-year. Hill says, “To significantly increase the chance of a December rate cut, the numbers would need to show a significant downside surprise.”
If inflation beats expectations, sterling could strengthen against the dollar, reinforcing expectations that the Bank of England will only be able to cut interest rates at a gradual pace from 2025, with only four more cuts possible.
Some major retail and hospitality companies have also warned that higher employer National Insurance contributions could lead to higher costs for consumers and potentially job losses. “This increase could put additional pressure on the economy,” said Jane Foley, chief foreign exchange strategist at Rabobank.
The Bank of England could respond to any signs of a slowdown by cutting interest rates again next month, taking into account that this would not lead to a significant increase in inflation. The bank appears to believe that allowing growth to contract could help to reduce inflation further in 2025-26. Any signs of an acceleration in the rate cuts could put additional pressure on sterling, adding to speculation of market volatility ahead.
