Pound Sterling advances as BoE interest-rate decision looms

• The Pound Sterling advances against most of its peers as the BoE is expected to keep borrowing rates steady at 4.75%.
• UK inflation has accelerated in the past two months, supporting the BoE's decision to keep interest rates steady.
• The Fed cut interest rates by 25 basis points to 4.25%-4.50% but delivered hawkish guidance for 2025.

The Pound Sterling (GBP) performs strongly against its major peers, except the Euro (EUR), ahead of the Bank of England’s (BoE) monetary policy decision, which will be announced at 12:00 GMT. The BoE is expected to leave interest rates unchanged at 4.75% with an 8-1 vote split. The Monetary Policy Committee (MPC) member who is expected to vote for a 25-basis points (bps) interest rate reduction is Swati Dhingra, who has been consistently supporting a more expansionary policy stance.

The BoE is almost certain to keep interest rates steady as inflationary pressures in the United Kingdom (UK) have accelerated in the last two months. The UK Consumer Price Index (CPI) data for November showed that annual headline inflation accelerated to 2.6%, as expected, from 2.3% in October. The core CPI—which excludes volatile items such as food, energy, alcohol, and tobacco—rose to 3.5% from the former reading of 3.3%.

Investors will pay close attention to BoE’s guidance on the policy outlook. "We think it's too early for the BoE to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated," analysts at Bank of America (BofA) said. 

According to market expectations, the BoE is expected to cut interest rates three times in 2025.

On the economic data front, investors will focus on the UK Retail Sales data for November, which will be released on Friday. Retail Sales, a key measure of consumer spending, are expected to rise by 0.5% on month after declining by 0.7% in October.

Daily digest market movers: Pound Sterling gains against USD, but broader outlook remains bearish

• The Pound Sterling recovers to near 1.2660 against the US Dollar (USD) in Thursday’s London session after plunging to near 1.2560 on Wednesday. The GBP/USD pair rebounds as the US Dollar’s (USD) rally has paused after refreshing a two-year high. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, edges lower but holds the key support of 108.00.
• The Greenback soared as the Federal Reserve (Fed) signaled fewer interest rate cuts for 2025 after cutting them by 25 bps to 4.25%-4.50%. The Fed’s dot plot showed that policymakers see Federal Fund rates heading to 3.9% in 2025, upwardly revising the projections from the 3.4% estimated in September.
• Fed Chair Jerome Powell said at the press conference that economic strength gives the Fed the ability to approach rate cuts cautiously. When asked about the inflation outlook, Powell said he expects “inflation to continue to come down toward the 2% goal, on a 'sometimes bumpy' path”. Meanwhile, the Federal Open Market Committee (FOMC) has also raised core Personal Consumption Expenditure inflation (PCE) projections for 2025 to 2.5% from 2.2% in its latest economic projections.
• Analysts at Monex Europe expect the Fed to hold interest rates at their current levels at least through the first half of 2025.

Technical Analysis: Pound Sterling recovers from 1.2550

The Pound Sterling recovers sharply after refreshing a three-week low near 1.2555 against the US Dollar on Thursday. The GBP/USD pair rebounds as the upward-sloping trendline, which is plotted from October 2023 low around 1.2035, remains a key support zone below 1.2600.

The 14-day Relative Strength Index (RSI) hovers near 40.00. A breakdown below the same could trigger a downside momentum.

A death cross, represented by the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.2790, suggests a strong bearish trend in the long run.

Looking down, the pair is expected to find a cushion near the psychological support of 1.2500. On the upside, the 200-day EMA near 1.2815 will act as key resistance.