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Pound Sterling is finding its feet against the U.S. Dollar following last week's dip.
The Pound to Dollar (GBP/USD) exchange rate fell to a new multi-month low last week before picking itself up and rebounding.
That rebound extends into Monday, and a climb could extend to the nine-day exponential moving average (EMA) at 1.2612.
Last week's low at 1.2472 will be the interim support zone that will potentially see us through the Christmas period, which will be characterised by think liquidity conditions.
Although there is little on the calendar to bother markets, thin conditions can often see some outsized moves, which could provide those still watching the market with some excitement.
The general rule, however, is that such moves will ultimately fade, and we do not anticipate any new directional trends emerging in the coming days.
UK economic data was released Monday, with the ONS saying the UK economy flatlined in the third quarter (0% q/q growth), marking a disappointing start to Keir Starmer's term as Prime Minister.
Above: GBP/USD at daily intervals, showing the nine-day EMA (blue line) and the 1.2472 interim low.
Gallingly for Sir Keir, the handover from his predecessor, Rishi Sunak, was even better than previously thought as the ONS revised higher Q2 growth to 0.4%.
This gives us a picture of an economy that has seen the brakes slammed by the new leaders on Whitehall.
It is little wonder, then, that the Bank of England last week expressed concerns about the economy's trajectory, raising the possibility that it will cut interest rates by more than the market currently expects.
The market went into last week's policy decision expecting two more 25 basis point cuts in 2025 but exited the week expecting between three and four.
The readjustment came after three of the nine members of the Monetary Policy Committee voted to cut rates immediately. Furthermore, the Bank lowered economic growth projections and sounded more cautious about the outlook.
It looks as though the Bank intends to maintain a quarterly pace to its rate-cutting cycle, forcing a readjustment in market expectations that was reflected in a weaker Pound.
Has that readjustment played out? We think so, for now, at least.
2024's second-best performing currency can, therefore, firm into the new year.
However, 2024's best-performing currency is the U.S. Dollar, and the trend for GBP/USD is lower.
As such, the playbook is for any rebounds to prove short-lived ahead of a fresh impetus lower.
This is why we think a move higher to the nine-day EMA at 1.2612 is a likely near-term outcome, and in the new year a retest of 1.2472 plays out, with a break to 1.23 then forming.
GBP/USD rebounded to above 1.25 on Friday, having hit a multi-month low in London trade, after the core PCE measure of U.S. inflation rose 0.1% month-on-month in November, which was half the 0.2% expected.
The year-on-year comparison was unchanged at 2.8% in November, whereas the market expected a rise to 2.9%.
This triggered some market relief and a selloff in the U.S. Dollar, which needs a steady supply of 'hawkish' data surprises to feed its rally. Any on-point or below-consensus data will, therefore, result in pullbacks.
Note that markets are also more settled on Monday thanks to weekend news that U.S. politicians agreed on a new spending bill that means a government shutdown was avoided.
The issue had caused some market anxiety last week, which contributed to USD strength.
Consolidation in GBP/USD above 1.2472 now looks likely, with gains extending to 1.2612.
However, early 2025 could see weakness resume as further U.S. outperformance is confirmed. "The setup for markets into 2025 is good for a continuation of trends. The U.S. election and the pivot to a stronger USD received support from the FOMC reducing expectations for rate cuts in 2025," says Bob Savage, Head of Markets Strategy and Insights at Bank of New York Mellon (NYSE:BK).
It's not all quiet this week as we have U.S. durable goods, Manufacturing ISM and jobless claims releases to digest.
"The risk of Q4 upside growth surprises dominates," says Savage.
An original version of this article can be viewed at Pound Sterling Live