The sterling/USD exchange rate fell to multi-month lows last week before recovering to return to the final sessions of the year interrupted by the holiday.
The short-term downtrend in GBP remains intact, putting key short-term support at 1.2485/90 at risk in the near term. GBP’s gains late last week were capped above 1.26 as strong selling pressure continued to greet sterling minor gains. A break below the upper 1.24 support would target a drop to 1.23,” says Shaun Osborne, analyst at Scotiabank.
Last week’s low at 1.2472 would be the temporary support area that sellers will target. This might help us get through the Christmas period, which will feature liquid conditions.
While the calendar doesn’t have much to rattle markets, fragile conditions can often lead to some big moves, which could provide some excitement for those still watching the market.
However, the general rule is that such moves will eventually fade, and we don’t expect any new directional trends to emerge in the coming days.
The pound remains weighed down by UK economic data released on Monday by the Office for National Statistics, which showed the UK economy flatlined in the third quarter (0% growth q/q), marking a disappointing start to Keir Starmer’s tenure as prime minister.
The Office for National Statistics said that growth in the second quarter was 0.4%, giving us a snapshot of the economy The reining in of the new leaders in Whitehall.
It is no surprise then that the Bank of England last week expressed concerns about the trajectory of the economy, raising the possibility of a bigger rate cut than the market currently anticipates.
Rate Cut Expectations Impact Sterling
The market went into last week’s policy decision expecting two more 25bp cuts in 2025 but came out of the week expecting between three and four.
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The adjustment came after three of the nine members of the Monetary Policy Committee voted to cut rates immediately. Furthermore, the Bank lowered its economic growth forecasts and sounded more cautious about the outlook.
The Bank intends to maintain a quarterly pace of rate cuts, forcing a readjustment in market expectations that reflects the weakness in sterling.
The best performing currency in 2024 remains the US dollar, and the trend for GBP/USD is bearish. Accordingly, the expected scenario is that any GBP/USD bounces will be short-lived before fresh downside momentum develops. A retest of 1.2472 should occur in the near term, with a break to 1.23 expected in the new year.
Early 2025 may bring a resumption of weakness as the US economy strengthens its dominance. “The market setup into 2025 is favorable for the continuation of trends. The US election and the shift to a stronger US dollar have received support from the FOMC, which has reduced expectations of a rate cut in 2025,” says Bob Fearless, Head of Markets Strategy and Insights at Bank of New York (BNY).
It has not been all quiet this week as we have US durable goods releases, ISM manufacturing and jobless claims to digest.
Pound Struggles but Outlook Remains Weak
The sterling pound has generally continued to struggle in global markets amid a series of downbeat economic surveys. However, a pullback in the dollar on benign inflation data has allowed the GBP/USD exchange rate to make gains.
From a 6-month low of 1.2475 late last week, the GBP/USD pair has recovered to 1.2570. Scotiabank commented; “A recovery of 1.2520+ could ease emerging downward pressures towards the 1.23 area.” Seasonal factors could also help support the pound in weak markets over the next couple of days.
According to the latest update from the Office for National Statistics, GDP remained unchanged for the third quarter of 2024 compared to a previous estimate of 0.1% growth. There was also a slight downward revision to Q2 to 0.4% from 0.5% with annual GDP growth of 0.9%.
The services sector recorded no growth during the quarter, while a 0.7% increase in the construction sector was offset by a 0.4% decline in output. Real GDP per capita fell by 0.2% for both the quarter and the previous year.
The British Retail Consortium (BRC) December survey on consumer expectations fell to -27% from -19% previously.
BRC chief executive Helen Dickinson commented: “Public confidence in the state of the economy has fallen sharply. If this forecast is realised, retailers may face spending pressure in the new year once they reveal their January sales.
The latest CBI and retail surveys for December were notably weak, reinforcing short-term reservations about the outlook.
According to the latest CBI growth index, businesses expect activity to fall in the first quarter with confidence falling to a two-year low.
