In a session marked by light trading volumes due to the Christmas holidays in global markets, the Pound Sterling is on an upward trajectory.
Federal Reserve policymakers anticipate the fund rates to reach 3.9% by the end of 2025. Meanwhile, the market has fully factored in two interest rate cuts by the Bank of England (BoE) for the upcoming year.
On Tuesday, the Pound Sterling (GBP) is strengthening against its major counterparts. This upward movement comes as investors choose to overlook a modest increase in the dovish expectations regarding the BoE’s future monetary policy. Traders are currently pricing in a 53-basis points (bps) reduction in interest rates for 2025, which is slightly higher than the 46 bps expected following the BoE’s policy announcement on Thursday.
The dovish sentiment towards the BoE intensified after three out of the nine members of the Monetary Policy Committee (MPC) suggested a 25 bps rate cut, exceeding the market’s initial projection. This 6-3 vote split was perceived by investors as a sign of a more dovish stance for the next year, initially weighing on the Pound Sterling.
However, BoE Governor Andrew Bailey refrained from outlining a specific rate cut path after keeping rates unchanged in December. He stated, “Due to the elevated uncertainty in the economy, we are unable to commit to the timing or magnitude of rate cuts in 2025.”
In contrast to the market consensus, analysts at Deutsche Bank predict that the BoE will announce four interest rate cuts next year, with one occurring in the first half and the remaining three in the second half.
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