Pound Sterling strengthens as investors overlook a slight increase in dovish expectations for the Bank of England (BoE)

The Pound Sterling (GBP) strengthens against its major peers on Tuesday, despite a mild increase in dovish bets regarding the Bank of England’s (BoE) policy for next year. Investors are largely overlooking the slight rise in expectations for a 53-basis point (bps) rate cut in 2025, up from 46 bps following the BoE’s last policy announcement.

The uptick in dovish sentiment stems from a recent BoE meeting where three out of nine Monetary Policy Committee (MPC) members voted for a 25 bps rate cut, more than the market had anticipated. This 6-3 vote split has fueled expectations for a more dovish stance in the coming year, putting pressure on the Pound.

However, BoE Governor Andrew Bailey avoided committing to a defined rate-cutting schedule after leaving rates unchanged in December. He emphasized that due to economic uncertainty, the central bank cannot predict when or by how much it will cut rates in 2025. In contrast, analysts at Deutsche Bank predict the BoE will implement four rate cuts next year, with one expected in the first half and the remaining three in the second half.

Daily Digest Market Movers: Pound Sterling Outperforms US Dollar

• The Pound Sterling (GBP) rises to near 1.2570 against the US Dollar (USD) in Tuesday’s North American session, with GBP/USD consolidating as trading volume remains low due to the holiday-shortened week, ahead of Christmas Eve and Boxing Day.
• The US Dollar Index (DXY), which tracks the Greenback against six major currencies, also trades sideways around 108.15.
• The broader outlook for the US Dollar remains positive, supported by expectations that the Federal Reserve (Fed) will pursue a more gradual interest rate cut approach in the coming year. Fed officials anticipate fewer rate cuts than initially expected due to a slower-than-anticipated disinflation process and uncertainty surrounding the effects of incoming immigration, trade, and tax policies from President-elect Donald Trump.
• According to the latest Fed dot plot, the federal funds rate is projected to reach 3.9% by the end of 2025, signaling more than one rate cut next year. The CME FedWatch tool shows that traders are pricing in the likelihood of the Fed leaving rates unchanged at 4.25%-4.50% for January’s policy meeting.
• Looking ahead to the US economic calendar, Initial Jobless Claims data for the week ending December 20, set for release on Thursday, stands as the key economic indicator that could influence the US Dollar. Analysts expect new jobless claims to come in at 218K, slightly lower than the previous figure of 220K.

Technical Analysis: Pound Sterling Remains Vulnerable on Death Cross Formation

The Pound Sterling continues to face pressure against the US Dollar, having broken below the upward-sloping trendline around 1.2600, drawn from the October 2023 low of 1.2035.

A death cross, formed by the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.2790, signals a strong bearish outlook in the long term.

The 14-day Relative Strength Index (RSI) has dipped below 40.00, suggesting potential for further downside momentum if the oscillator stays below this level.

To the downside, the pair may find support near the April 22 low around 1.2300. On the upside, key resistance lies at the December 17 high of 1.2730.