Pound Sterling retreats against US Dollar in light volume conditions before New Year.

The Pound Sterling falls back against the US Dollar as the latter rebounds.
Goldman Sachs sees the BoE reducing interest rates in each quarter of the next year.
The US Dollar flattens in illiquid trading conditions before New Year celebrations.

The Pound Sterling (GBP) drops to near 1.2550 after failing to extend the intraday high of 1.2600 and turns negative against the US Dollar (USD) in Monday’s North American session. The GBP/USD pair falls as the US Dollar (USD) bounces back in thin trading volume conditions before New Year celebrations. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to near 108.30 and is set to end the year with almost 6.7% gains.

The USD performed strongly this year even though the Federal Reserve (Fed) reduced its key borrowing rates by 100 basis points (bps) to 4.25%-4.50%. The Greenback has gained significantly in the last three months after Republican Donald Trump’s victory in the United States (US) Presidential election as policies such as immigration control, higher import tariffs, and lower taxes are expected to be inflationary and pro-growth.

The Fed has also signaled fewer interest rate cuts in 2025 amid strong economic growth prospects, a slowdown in the disinflation trend, and better labor market conditions than previously forecasted. However, Fed Chair Jerome Powell refrained from guiding the likely impact of Trump’s policies on the economy.

“It is very premature to make any kind of conclusions,” Powell said on December 18. “We don’t know what will be tariffed, from what countries, for how long, in what size,” he added.

This week, the major trigger for the Pound Sterling and the US Dollar will be the final estimates for the December S&P Global and US ISM Manufacturing Purchasing Managers’ Index (PMI) data

Pound Sterling drops as market experts see more interest rate cuts by the BoE in 2025 compared to market pricing

The Pound Sterling faces pressure against its major peers on Monday. The British currency drops amid a mild increase in the Bank of England’s (BoE) dovish bets for 2025.
Traders price in a 53-basis points (bps) interest rate reduction for the next year, up from the 46 bps estimated after the policy announcement on December 19, when the Bank of England (BoE) left borrowing rates unchanged at 4.75% with a 6-3 vote split. Before the policy announcement, market participants were anticipating that only one Monetary Policy Committee (MPC) would vote for a rate cut.
The BoE has been the slowest among European and North American nations to reduce interest rates this year. The BoE has reduced its key borrowing rates by 50 bps, while other peers such as the Federal Reserve (Fed) and the European Central Bank (ECB) pushed their borrowing rates lower by 100 bps. The Bank of Canada (BoC) and the Swiss National Bank (SNB) lowered interest rates by even more due to higher risks of inflation undershooting their respective targets.
“UK wage growth and services inflation have remained notably stickier than elsewhere, despite signs of material labor market rebalancing,” analysts at Goldman Sachs said in a note. “As a result, the BoE has been more cautious than other major central banks,” they added. However, the investment banking firm expects continued quarterly cuts through 2025, more than what markets expect, as a “weaker labor market cools underlying inflation.”

Free Forex Signals