December 19, 2024 (Globalinvestorideas.com Newswire) Globalinvestorideas.com, a go-to platform for big investing ideas releases market commentary from Rania Gule, Senior Market Analyst at XS.com
The GBP/USD pair is experiencing a period of volatility amid diverging monetary policies from the Bank of England and the U.S. Federal Reserve. On Thursday, the pair was trading near 1.2609. The Bank of England’s decision to keep interest rates unchanged at 4.75% reflects a cautious stance towards inflation but sends no clear signals to the market regarding future policy direction. Meanwhile, the U.S. dollar gained strength after the Federal Reserve cut interest rates by 25 basis points to a range of 4.25%-4.50%, underscoring the differing priorities of the two central banks.
In its most recent meeting, the Bank of England reiterated the importance of keeping inflation near its target, signalling a gradual approach to monetary easing. While this cautious stance is justified given the annual inflation in services prices remains high at 5%, recent economic data, such as the rise in the core Consumer Price Index (CPI) to 3.5% in November from 3.3% in October, highlights ongoing challenges for the central bank. From my perspective, keeping the policy unchanged does not directly address the growing concerns about inflation, which remains above the target, potentially leading to a short-term decline in the pound.
On the other hand, the U.S. dollar has shown resilience amid the Federal Reserve’s cautious approach. The recent rate cut reflects the Fed’s intent to support the economy amid signs of a potential slowdown. However, the Summary of Economic Projections indicates only two rate cuts in 2025, reinforcing the view that the Fed is not rushing into monetary easing. This restrained approach provides the dollar with relative strength, putting pressure on the GBP/USD pair and limiting the pound’s ability to achieve sustained gains.
In my view, the current level of the pair at 1.2590 reflects an attempt by the pound to benefit from upward support, focusing on addressing high domestic inflation. However, the relative strength of the U.S. dollar, backed by positive U.S. economic data such as existing home sales and GDP growth, imposes constraints on any potential upward momentum. As a result, I believe the markets may continue trading in a limited range with a bearish bias, as the Bank of England’s decisions lack sufficient impact to support a strong rally for the pound.
Inflation in the U.K. remains a key challenge for the Bank of England, with recent data showing a modest increase in the CPI. Although rising prices point to ongoing pressures, the central bank appears committed to a gradual approach, possibly reflecting concerns about the adverse effects of further tightening on the domestic economy.
While this approach may be economically prudent, it could come at the expense of the British currency’s strength. In my opinion, the Bank of England needs to provide clearer signals regarding its future strategy, whether through stronger statements or more detailed forecasts, to boost market confidence.
Meanwhile, the Federal Reserve demonstrates strategic discipline in addressing inflation, which remains above its 2% target. Fed Chair Jerome Powell’s remarks on being cautious with future rate cuts highlight the bank’s understanding of the importance of maintaining price stability. This balance in monetary policy gives the dollar a competitive edge compared to the pound, which suffers from a lack of clarity on the Bank of England’s future direction. I believe the evident divergence between the two central banks strengthens the likelihood of continued downward pressure on the GBP/USD pair.
In conclusion, the pair is likely to remain under the influence of opposing forces in the near term. Its performance will depend on developments in monetary policies in both the U.K. and the U.S., as well as upcoming economic data. Despite temporary support for the pound, the absence of decisive and clear actions from the Bank of England may lead to the continued weakness of the British currency against the dollar. I think investors and traders need to closely monitor upcoming data and central bank officials’ statements, as any shift in tone or policy could significantly reshape prices and trends.
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