The GBP/USD pair has been among the strongest currencies in the G10 space so far this week, owing to strength in UK data and diminishing hopes that the Bank of England will deliver a rate cut at this week’s policy meeting. While the European Central Bank and Swiss National Bank both cut interest rates last week, UK’s sticky services inflation is likely to prevent the BoE from following its European counterparts.
However, the GBP/USD could still fall because of (1) the potential that we could see a more aggressive easing stance by spring of 2025 by the UK central bank and (2) the potential for US dollar to extend its rally with the US Federal Reserve rate decision now just a day away.
Indeed, investors are eagerly watching the economic data calendar for what could be the final hurrah for volatility in 2024, with the Fed, BoJ, as well as the BoE, all poised to reveal their rate decisions in the next couple of days and provide an outlook for the upcoming year. All told, I think the path of least resistance on the GBP/USD is still to the downside.
UK data underscores challenges facing the BoE
This morning’s release of UK wages data surprised to the upside, and with it killed any hopes for a BoE rate cut this week. The Average Earnings Index rose to 5.2% on a 3m/y basis, beating the 4.6% reading expected. Strong wage growth and sticky inflation in the services sector are factors discouraging the BoE to cut rates further.
The latest UK wage data come hot on the heels of global PMI figures released yesterday. The key theme was faster-than-expected manufacturing contraction but stronger services expansion. The standout was the US services PMI, hitting a 38-month high of 58.5, driven by firm optimism about output under a new Trump administration. Coming just ahead of the year’s final FOMC meeting, it highlights the US economy’s resilience and potential for strength—factors that could fuel inflation and a less dovish Fed.
Meanwhile, the UK’s Composite PMI was unchanged in December, although the UK private sector employment showed the fastest decline for nearly four years. The services PMI climbed to a two-month high of 51.4 from 50.4, beating estimates.
Had it not been for strong wage growth and sticky services inflation, the economy would warrant lower interest rates.
Indeed, the UK’s manufacturing PMI hit an 11-month low of 47.3 compared to 48.0 in November. New orders decreased for the first time in 13 months amid widespread reports of weaker business and consumer spending patterns, according to the report by S&P Global. This is in part because of the still-strong inflationary pressures in the UK compared to other economic regions – the precise reason why the BoE may well decide to cut rates this week.
The report noted:
“Rising salary payments and elevated domestic inflationary pressures continued to push up cost burdens across the private sector in December… the rate of input price inflation accelerated for the second month running to its strongest since April. Manufacturers recorded the steepest rise in purchasing prices since January 2023.”
The latest PMI data comes after Friday’s soft UK growth data, which caused the GBP/USD to slide towards 1.26 handle as the EUR/GBP jumped back up from near 0.82 to above 0.83 and in the process turned positive on the week.
US dollar support ahead of potential hawkish FOMC cut
Last week’s US CPI data brought no surprises, though the hotter-than-expected PPI did raise a few eyebrows, as too did the strong flash services PMI on Monday. Traders seem confident in their expectations of a rate cut at the Federal Reserve’s final meeting of the year on Wednesday.
With a 25-basis-point reduction now almost fully priced in, the Fed has little room to diverge without causing notable market disruption. The real question is whether the Fed will pause rate cuts in early 2025 or stick to the current pace of 25-basis-point reductions at upcoming meetings.
Jerome Powell’s comments last month – noting that risks to the labor market had diminished while inflation remained more persistent than anticipated – have fuelled speculation of a hawkish cut. As a result, Powell’s remarks at the post-meeting press conference and the Fed’s updated economic and rate projections will be pivotal in shaping market sentiment.
For my part, I expect the Fed to deliver a hawkish cut. President-elect Trump’s policy plans – featuring immigration controls, tariffs, and both personal and corporate tax cuts – are likely to push the Fed towards signaling a more cautious and measured path of easing through 2025. This should keep the dollar well-supported, leaving the GBP/USD outlook forecast bearish.
GBP/USD technical analysis and trade ideas
From a technical standpoint, the GBP/USD looks to be in a better shape than many other pairs such as the AUD/USD or CAD/USD. Even so, the path of least resistance remains to the downside as the US dollar looks to be the strongest currency out there.
Source: TradingView.com
For now, key short-term resistance lies around the 1.2715/20 level after we broke decisively below this point last week. This may well have opened the door for a drop below the 1.2600 zone. Beneath that, the psychologically significant 1.25 level comes into focus, which previously acted as support after a brief dip to November’s low of 1.2487.
As before, the next big resistance above the 1.2715/20 area to watch is in the 1.2800–1.2870 range. This area has served as both support and resistance in the past and coincides with the 200-day moving average, making it a critical level to monitor the cable were to make a recovery in the week ahead.
Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.