The GBP/USD pair remains subdued, trading within a narrow range around the 1.2570 area during the early Asian session on Monday. Despite a modest recovery from Friday’s multi-month low of 1.2475, several headwinds keep the pair's upside potential in check.
US Dollar Strength and Fed’s Hawkish Stance
The US Dollar (USD) has softened slightly from recent highs following the November Personal Consumption Expenditures (PCE) Price Index report, which pointed to easing inflation and potential economic challenges. However, the Federal Reserve’s (Fed) hawkish stance continues to lend support to the greenback.
Last week, the Fed implemented a 25-basis-point rate cut, as expected, but signaled a slower pace of monetary easing in 2025. The revised dot plot now projects a more measured rate-cut trajectory, which has bolstered US Treasury bond yields. Additionally, geopolitical uncertainties, including the prolonged Russia-Ukraine conflict and tensions in the Middle East, underpin the safe-haven appeal of the USD.
Bank of England’s Dovish Outlook Weighs on GBP
The British Pound (GBP) remains under pressure as the Bank of England (BoE) adopts a dovish monetary policy stance. Last week’s split decision to maintain interest rates, coupled with a downgraded economic outlook for Q4 2024, has dampened market sentiment. Notably, three BoE Monetary Policy Committee (MPC) members voted for a rate cut, signaling caution amid slowing economic activity.
These factors discourage aggressive bullish bets on GBP, further limiting the upside for GBP/USD.
Economic Data and Near-Term Outlook
Market participants are now eyeing the BoE’s Quarterly Bulletin and the US Consumer Confidence Index for further direction. However, the current fundamental backdrop suggests caution before assuming a bottom for GBP/USD.
In summary, while the USD’s slight pullback offers some relief to GBP/USD, the combination of a hawkish Fed, elevated bond yields, and the BoE’s dovish tone could keep the pair under pressure in the near term. Traders should look for stronger follow-through buying to confirm any meaningful recovery in the pair.
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