In the North American session on Monday, the Pound Sterling (GBP) declined against the US Dollar (USD), trading near 1.2550 after failing to sustain an intraday high of 1.2600. The GBP/USD pair was pressured as the USD bounced back in the thinly traded market conditions prior to the New Year celebrations. The US Dollar Index (DXY), which monitors the dollar’s value against six major currencies, climbed to around 108.30 and is on track to conclude the year with approximately 6.7% gains.
The USD has shown strength this year, despite the Federal Reserve’s 100 basis points reduction in its key borrowing rates to 4.25%-4.50%. The dollar has surged notably in the past three months following the victory of Republican Donald Trump in the US Presidential election. Trump’s proposed policies, such as immigration control, higher import tariffs, and lower taxes, are expected to fuel inflation and support economic growth.
The Fed has also signaled fewer interest rate cuts in 2025, considering the positive economic growth outlook, a slowdown in disinflation, and an improved labor market compared to earlier forecasts. However, Fed Chair Jerome Powell has been cautious about predicting the impact of Trump’s policies on the economy.
For the Pound Sterling, market experts foresee more interest rate cuts by the Bank of England (BoE) in 2025 than currently priced in by the market. The GBP is under pressure as dovish expectations for the BoE in 2025 have slightly increased. Traders now anticipate a 53-basis points interest rate reduction next year, up from the 46 bps estimated after the December 19 policy announcement, when the BoE maintained borrowing rates at 4.75% with a 6-3 vote split.
The BoE has been slower than other central banks in Europe and North America to cut rates this year, having reduced its key borrowing rate by only 50 bps, while the Fed and the European Central Bank (ECB) cut by 100 bps. The Bank of Canada (BoC) and the Swiss National Bank (SNB) made even deeper cuts due to higher risks of inflation falling below their targets.
Goldman Sachs analysts noted that “UK wage growth and services inflation have remained notably stickier than elsewhere, despite signs of material labor market rebalancing. As a result, the BoE has been more cautious than other major central banks.” The firm anticipates continued quarterly rate cuts through 2025, exceeding market expectations, as a “weaker labor market cools underlying inflation.” This week, the final estimates of the December S&P Global and US ISM Manufacturing Purchasing Managers’ Index (PMI) data will be a significant market mover for both the Pound Sterling and the US Dollar.
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