03 Jan 2025

The Pound Sterling appears to be at risk around the 1.2400 mark against the US Dollar, particularly as the Federal Reserve has indicated a reduced likelihood of interest rate cuts in the current year.

Additionally, a decline in US Initial Jobless Claims suggests a strengthening of labor market conditions.

Meanwhile, the Bank of England is anticipated to implement a 60 basis point reduction in interest rates this year.

The Pound Sterling (GBP) is currently trading close to an eight-month low, approximately 1.2400 against the US Dollar (USD) during the North American session on Friday. The GBP/USD pair is experiencing downward pressure as the US Dollar continues its upward trend, driven by market expectations of fewer interest rate reductions from the Federal Reserve in the current year.

The most recent dot plot from the Federal Reserve's Summary of Economic Projections indicates that policymakers anticipate Federal Fund rates will rise to 3.9% by the conclusion of 2025, an increase from the 3.4% projected in September.

The US Dollar Index (DXY), which measures the value of the dollar against six major currencies, is trading close to a new two-year peak above 109.00, a level reached on Thursday. This upward movement is partially supported by a decrease in Initial Jobless Claims in the United States and a positive economic outlook stemming from forthcoming policies, including stricter immigration measures, elevated import tariffs, and reduced taxes under the administration of President-elect Donald Trump.

For the week ending December 27, the number of individuals filing for initial jobless benefits was recorded at 211,000, the lowest figure in eight months, reflecting a robust labor market.

During Friday's trading session, investors will be attentive to the US ISM Manufacturing Purchasing Managers Index (PMI) data for December, scheduled for release at 15:00 GMT. Economists predict that the PMI will remain stable at 48.4, indicating that the manufacturing sector continues to experience a consistent contraction.

Daily digest market movers: Pound Sterling trades cautiously as BoE dovish bets tick higher

The Pound Sterling is experiencing cautious trading against its major counterparts on Friday, influenced by disappointing S&P Global/CIPS Manufacturing PMI data for December from the United Kingdom. The final PMI report released on Thursday indicated a more pronounced contraction in manufacturing activity, registering at 47.0, a decline from the preliminary figure of 47.3. The report highlighted a widespread downturn, with significant declines observed across the consumer, intermediate, and investment goods sectors.

Rob Dobson, Director at S&P Global Market Intelligence, remarked that "Business sentiment has reached its lowest point in two years, as the new Government's rhetoric and policy changes undermine confidence and increase costs for UK factories and their clients. Small and medium-sized enterprises are particularly affected during this downturn."

Additionally, the Pound Sterling has been negatively impacted by increasing dovish expectations regarding the Bank of England (BoE). Market participants are now anticipating approximately 60 basis points (bps) of interest rate cuts by the BoE this year, an increase from the 53 bps projected in the final week of December.