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The Pound to Dollar exchange rate has been under considerable pressure, but there is increasing prospect for a small recovery.
To be sure, the overwhelming setup is one that continues to favour the U.S. Dollar over the Euro and British Pound, and the theme for the first quarter of 2025 is for this trend to extend.
Although many market participants were on a two-week holiday, there was no rest for the Dollar which last week pushed the Euro and British Pound to fresh multi-month lows.
GBP/USD fell to a nine-month trough of 1.2351, and big picture, the exchange rate is likely to print a series of fresh multi-month lows ahead of a potential broader turnaround later in the year.
But, the strength of the Dollar can unwind somewhat in the short-term, offering tactical opportunities for Dollar buyers to get involved in the market.
The pair is in the process of returning to the nine-day Exponential Moving Average, having made a sizeable divergence last week. We always tend to see exchange rates mean-revert after big moves and we think this is the theme to watch in the coming days.
Note that some of last week's USD strength against the European currencies was due to rising gas prices that threaten to squeeze the Eurozone and UK economies while bolstering earnings for the U.S. energy export engine. If gas prices can settle, so too will EUR and GBP.
The Relative Strength Index is also rebounding from near-oversold conditions, and the move has space to extend in the coming hours and days.
A return to 1.2490 is possible, ahead of a return to the mid-1.25s.
However, for now, this is where ambitions should be tempered as this is an exchange rate that is very much under the proverbial cosh.
Friday's non-farm payroll report is the marquee data release of the coming week, and strength here could push the Pound-Dollar exchange rate back to recent lows.
Analysts expect U.S. job gains to have remained elevated in December at 180k, registering only a modest slowdown from a 227k print in November.
Lead indicators have improved lately, confirming the U.S. economy's strong standing, which is consistent with ongoing U.S. Dollar strength.
An above-consensus report can pressure the GBP/USD into the weekend.
Bear in mind there will be a host of U.S.-centric events to watch before we get to Friday's job report. The Federal Reserve's Cook is due to give comments on the interest rate outlook on Monday, while U.S. S&P Global PMI survey data for December will provide a snapshot on ongoing U.S. economic strength.
Tuesday brings ISM PMI data, which tends to be of more interest than the S&P Global version. Job opening data is also due for release.
Wednesday sees the Fed's Waller speak and the release of the minutes of the Fed's December meeting, at which it cut interest rates but warned it was less likely to do so in 2025, a communication which pushed the Dollar higher.
Thursday sees the Fed's Harker, Bowman and Schmid speak. The overall theme should be one in which they communicate that the economy is strong and does not need interest rate cuts for support, as this could risk raising inflation.
There is much uncertainty in the outlook as Donald Trump prepares to return to the White House. For now, analysts think Trump will bring inflationary policies, which will require the Fed to forgo further rate hikes.
All this is supportive of the Dollar.
"Unlike 2022, when investment in the dollar became crowded prompting a correction, there is far less invested in the greenback now, and judged by moves in emerging markets there is growing demand. Drops into uncharted waters for many currencies may limit the supply of dollars, leading to an even faster rise in its value," says Jeremy Boulton, a market analyst at Reuters.
An original version of this article can be viewed at Pound Sterling Live