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Pound Sterling ticks lower against USD despite firm Fed dovish bets.

December 12, 2024

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The Pound Sterling ticks lower, but the assumption that the BoE will keep interest rates steady on December 19 keeps its broader outlook firm.
Traders expect the BoE to cut interest rates at a slower pace when compared to other central banks in Europe and North America..
Markets fully price in that the Fed will cut interest rates by 25 bps on Wednesday.

The Pound Sterling (GBP) surrenders gains against the US Dollar (USD) in Thursday’s late European session after failing to revisit the key resistance of 1.2800. The GBP/USD pair falls back as the US Dollar (USD) recovers losses, with the US Dollar Index (DXY) returning above 106.50. The Greenbac rebounds despite firm expectations that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement on Wednesday.

Traders have almost fully priced in an interest rate reduction of 25 basis points (bps) to 4.25%-4.50% by the Fed for next week’s policy meeting, according to the CME FedWatch tool. Fed dovish bets strengthened after the release of the United States (US) Consumer Price Index (CPI) report for November on Wednesday, which showed that inflationary pressures grew in line with estimates.

The CPI report showed that annual headline and core inflation – which excludes volatile food and energy prices – rose by 2.7% and 3.3%, as expected. The growth in headline inflation was the highest in four months, suggesting that progress in the disinflation process has stalled. Still, moderate growth in rental prices prompted dovish Fed bets.

Investors will pay close attention to the US Producer Price Index (PPI) data for November and the Initial Jobless Claims data for the week ending December 6, which will be published at 13:30 GMT.

Daily digest market movers: Pound Sterling drops but remains broadly upbeat

The Pound Sterling ticks lower against its major peers on Thursday ahead of the United Kingdom (UK) monthly Gross Domestic Product (GDP) and the factory data for October, which will be released on Friday. The data will indicate the current status of nation’s economic health.
The British currency remains broadly firm against its major counterparts due to expectations that the Bank of England (BoE) will follow a more gradual policy-easing cycle compared with other central banks in Europe and North America.
Inflation in the United Kingdom (UK) services sector remains high, allowing the BoE to remain in a slow lane towards interest rate cuts. BoE Monetary Policy Committee (MPC) external member Megan Greene warned in her latest commentary that she suspects the BoE’s inflation target “by the end of our forecast period, which is three years.”
Signs of more government expenditure and higher employer costs in Labour’s first budget have also escalated uncertainty over the inflation outlook. UK employers are expected to pass on the impact of higher employers’ contribution to National Insurance to consumers.
Market expectations that the BoE will cut interest rates at a moderate pace have also kept the Pound Sterling strong against the US Dollar this year, unlike other European currencies such as the Euro (EUR) and the Swiss Franc (CHF), which are down 4.9% and 5.5%, respectively.
For the BoE policy meeting announcement on December 19, traders see the central bank leaving interest rates unchanged at 4.75%, but price in three interest rate cuts in 2025.