Pound Sterling trades broadly firm as markets expect BoE to leave rates unchanged next week

• The Pound Sterling trades sideways but remains firm on the assumption that the BoE will keep interest rates steady on December 19.
• Traders expect the BoE to cut interest rates at a slower pace when compared to other central banks in Europe and North America..
• Markets fully price in that the Fed will cut interest rates by 25 bps on Wednesday.

The Pound Sterling (GBP) consolidates against its major peers on Thursday, but the British currency remains firm against its major counterparts due to expectations that the Bank of England (BoE) will follow a more gradual policy-easing cycle compared with other central banks in Europe and North America.

Inflation in the United Kingdom (UK) services sector remains high, allowing the BoE to remain in a slow lane towards interest rate cuts. BoE Monetary Policy Committee (MPC) external member Megan Greene warned in her latest commentary that she suspects the BoE’s inflation target “by the end of our forecast period, which is three years.”

Signs of more government expenditure and higher employer costs in Labour’s first budget have also escalated uncertainty over the inflation outlook. UK employers are expected to pass on the impact of higher employers’ contribution to National Insurance to consumers.

Market expectations that the BoE will cut interest rates at a moderate pace have also kept the Pound Sterling strong against the US Dollar this year, unlike other European currencies such as the Euro (EUR) and the Swiss Franc (CHF), which are down 4.9% and 5.5%, respectively.

For the BoE policy meeting announcement on December 19, traders see the central bank leaving interest rates unchanged at 4.75%, but price in three interest rate cuts in 2025.

On the economic data front, investors await the monthly Gross Domestic Product (GDP) and the factory data for October, which will be released on Friday, to get cues about the current status of the UK’s economic health.

Daily digest market movers: Pound Sterling ticks up against US Dollar

• The Pound Sterling moves higher against the US Dollar (USD) in Thursday’s London session but continues to struggle to revisit the key resistance of 1.2800. The GBP/USD pair rises as the US Dollar (USD) drops amid firm expectations that the Federal Reserve (Fed) will cut interest rates in the monetary policy announcement on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops around 106.50.
• Traders have almost fully priced in an interest rate reduction of 25 basis points (bps) to 4.25%-4.50% by the Fed for next week’s policy meeting, according to the CME FedWatch tool. Fed dovish bets strengthened after the release of the United States (US) Consumer Price Index (CPI) report for November on Wednesday, which showed that inflationary pressures grew in line with estimates.
• The CPI report showed that annual headline and core inflation – which excludes volatile food and energy prices – rose by 2.7% and 3.3%, as expected. The growth in headline inflation was the highest in four months, suggesting that progress in the disinflation process has stalled. Still, moderate growth in rental prices prompted dovish Fed bets.
• Investors will pay close attention to the US Producer Price Index (PPI) data for November and the Initial Jobless Claims data for the week ending December 6, which will be published at 13:30 GMT.

Technical Analysis: Pound Sterling stalls around 1.2750

The Pound Sterling consolidates in a tight range around 1.2750 against the US Dollar for almost a week. The GBP/USD pair holds slightly above the 20-day Exponential Moving Average (EMA) around 1.2720.

The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting a sideways trend.

Looking down, the pair is expected to find a cushion near the upward-sloping trendline around 1.2500, which is plotted from the October 2023 low near 1.2035. On the upside, the 200-day EMA around 1.2830 will act as key resistance.