On Monday, the British pound (GBP) held steady against the US dollar (USD), floating around 1.3230 during European trading, while it showed weakness against other currencies. It seemed GBP/USD gained some ground as the dollar continued to weaken, with expectations building that the US Federal Reserve might cut interest rates in their upcoming monetary policy statement.
During trading in Europe, the US Dollar Index (DXY), which measures the dollar against six major currencies, dipped to a two-week low of about 99.30.
According to the CME FedWatch tool, there’s an 87.5% likelihood that the Fed will lower interest rates by 25 basis points (bp) to a range of 3.50-3.75% come December.
There remains a dovish sentiment from the Fed, largely influenced by a sluggish US labor market and the limited expected impact of tariffs on inflation.
Market Update: Investors await key data
- At the start of the week, the British pound experienced a decline against key currencies. This downturn seems driven by traders increasingly forecasting that the Bank of England will reduce interest rates in its last monetary policy announcement for the year on December 18.
- Market participants predict a 25 basis points cut from the Bank of England to 3.75%, especially following recent UK data indicating a slowdown in job growth and inflation.
- Alongside the central bank’s dovish outlook, falling government bond yields may limit any advance in the pound. This comes after Chancellor of the Exchequer Rachel Reeves revealed new tax hikes in last week’s autumn budget. The UK 10-year bond yield stands around 4.44%, down nearly 4% from November’s high of 4.62%.
- In that budget report, Mr. Reeves stated the government plans to raise taxes by £26bn by 2029-30 to address the fiscal deficit. Moody’s has recognized Labor’s attempts to mitigate debt but has highlighted “execution risks.” While striving to realign public finances is positive, these risks remain significant, according to Moody’s.
- This week, the GBP/USD exchange rate will be influenced by various US economic indicators, notably the November ADP employment change data due on Wednesday.
- The ADP employment change report illustrates the current demand for labor in the private sector. Economists anticipate that about 20,000 new jobs will be added in November, a drop from October’s 42,000.
- On Monday, investors will turn their attention to the US ISM Manufacturing Purchasing Managers’ Index (PMI) for November, which will be released at 15:00 GMT, expecting a slight uptick to 48.6 from 48.7 in October.
Technical Insights: GBP/USD signals a potential shift
On the daily chart, GBP/USD is steady at 1.3224 and might see increased interest as a double bottom formation hints at a bullish reversal. However, the presence of the 200-day exponential moving average (EMA) around 1.3265 poses a significant hurdle for GBP bulls.
The Relative Strength Index (RSI) indicates a neutral to bullish trend at 52.75, reflecting a gradual recovery in momentum.
If GBP/USD breaks decisively above the 200-day EMA, it could push toward the high of 1.3370 reached on October 28. Nevertheless, November’s low around 1.3040 will be a critical support level to watch.
