16 Dec 2024

GBP/USD draws interest from some dip-buyers on Monday; however, the increase does not exhibit strong bullish confidence. Traders appear hesitant to make directional investments in anticipation of the upcoming Federal Reserve and Bank of England policy meetings. This week's significant macroeconomic data from both the UK and the US is expected to introduce volatility into the market.

The GBP/USD pair has experienced a slight increase at the beginning of a busy week, appearing to have ended a three-day decline that brought it close to the 1.2600 level, which represents a two-week low reached on Friday. Current trading prices for the currency are situated in the 1.2630-1.2635 range, reflecting a 0.10% rise for the day; however, significant gains seem unlikely in light of the key central bank events scheduled for this week.

The Federal Reserve (Fed) is set to announce its policy decision on Wednesday, followed by the Bank of England (BoE) meeting on Thursday. The US central bank is largely anticipated to implement a third consecutive reduction in borrowing costs, although traders are factoring in the potential for a more gradual approach to rate cuts in the coming year. Consequently, the forthcoming policy statement, updated economic forecasts—including the dot-plot—and comments from Fed Chair Jerome Powell during the post-meeting press conference will be closely examined for insights regarding the future trajectory of rate cuts. This will significantly impact the near-term dynamics of the US Dollar (USD) and subsequently influence the GBP/USD pair.

The UK central bank is expected to keep interest rates steady, maintaining the current level. Additionally, the Bank of England (BoE) has emphasized its commitment to a gradual reduction in interest rates in response to increasing inflation expectations. Forecasts from the BoE and other institutions indicate that inflation is likely to rise next year, influenced by the substantial budget proposed by UK finance minister Rachel Reeves. Consequently, BoE Governor Andrew Bailey's cautious stance, which suggests four potential interest rate cuts in 2025, may deter traders from making aggressive bullish investments in the British Pound (GBP) and could pose challenges for the GBP/USD pair. This situation necessitates a careful approach before concluding that spot prices have reached a low point around the 1.2600 level.

This week, investors will also be faced with the release of significant macroeconomic data from both the UK and the US, beginning with the flash PMI figures later today. Following this, key reports will include the UK monthly employment statistics and US Retail Sales on Tuesday, UK consumer inflation data on Wednesday, the final US GDP figures on Thursday, and UK Retail Sales on Friday, all of which are likely to introduce volatility in the GBP/USD pair.