The British pound settled around the 1.3230 level against the US dollar, and weakened against other currency pairs, during the European trading session on Monday. GBP/USD is consolidating while the US dollar falls further on strong expectations that the Federal Reserve will cut interest rates in its monetary policy announcement next week.
During European trading hours, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, hit a new two-week low near 99.30.
The CME FedWatch tool shows that the probability of the Fed cutting rates by 25 basis points to 3.50%-3.75% in December is 87.5%.
The Fed’s dovish speculation remained intense due to weakness in the US labor market and expectations that the impact of tariffs on inflation remains limited.
Daily summary of market drivers: Investors await ISM and ADP employment change data
- The British pound is trading lower against its major counterparts at the beginning of the week. The British currency has come under pressure as traders grow more confident that the Bank of England (BoE) will cut interest rates in its last monetary policy announcement of the year on December 18.
- Investors expect the Bank of England to cut interest rates by 25 basis points to 3.75%, as the latest UK data showed signs of further weakness in job growth and slowing inflation growth.
- In addition to the Bank of England’s dovish outlook, a decline in government bond yields, following Treasury Secretary Rachel Reeves’ announcement of new tax rises in the Autumn Budget report, released last Wednesday, is also expected to limit the upside in sterling. UK 10-year bond yields fell nearly 4% to close to 4.44% from a November high of 4.62%.
- Reeves announced in the budget report that the government would increase taxes by £26 billion by 2029-30 to plug the fiscal gap. Credit rating agency Moody’s acknowledged Labour’s efforts to reduce debt, while warning that “execution risks” remain intact. “Although the government’s willingness to return public finances to targets is positive, implementation risks remain high,” Moody’s said.
- This week, the GBP/USD pair will be affected by a large number of US data, especially the November US employment report, which will be released on Wednesday.
- ADP employment change data will indicate the current state of labor demand in the private sector. Economists expect the private sector to add 20,000 new workers in November, less than 42,000 workers in October.
- In Monday’s session, investors will focus on the US ISM Manufacturing Purchasing Managers’ Index (PMI) for November, which will be published at 15:00 GMT. The agency is expected to announce that the manufacturing PMI contracted at a faster pace to 48.6 from 48.7 in October.
Technical Analysis: GBP/USD has turned bullish after forming a double bottom
On the daily chart, GBP/USD is trading flat at 1.3224 and is expected to attract large buy orders as a breakout of the double bottom formation triggered a bullish reversal. However, the 200-day Exponential Moving Average (EMA) near 1.3265 continues to act as a major barrier for GBP bulls.
The Relative Strength Index (RSI) is at 52.75 neutral to bullish, reflecting a steady recovery in momentum.
Looking to the upside, the British pound could strengthen if it breaks decisively above the 200-day moving average. Such a scenario could lead the pair towards the highest level recorded on October 28 around 1.3370. On the downside, the November 21 low around 1.3040 will remain a key support level for the pair.
(The technical analysis for this story was written with the help of an artificial intelligence tool.)
Bank of England FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve “price stability,” or a constant inflation rate of 2%. Its tool for achieving this is by adjusting base lending rates. The Bank of England sets the rate at which commercial banks lend and banks lend to each other, and sets the level of interest rates in the economy as a whole. This also affects the value of the British Pound (GBP).
When inflation is above the Bank of England’s target, it responds by raising interest rates, making it more expensive for people and businesses to obtain credit. This is positive for the pound because higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls below target, it is a sign that economic growth is slowing, and the Bank of England will consider lowering interest rates to reduce the cost of credit in the hope that companies will borrow to invest in growth-generating projects – which is negative for the pound.
In extreme cases, the Bank of England can enact a policy called quantitative easing (QE). Quantitative easing is the process by which the Bank of England dramatically increases the flow of credit into a stuck financial system. Quantitative easing is a policy of last resort when lowering interest rates does not achieve the necessary result. Quantitative easing involves the Bank of England printing money to buy assets – usually AAA-rated government or corporate bonds – from banks and other financial institutions. Quantitative easing usually leads to a weakening of the British pound.
Quantitative tightening (QT) is the opposite of quantitative easing, which is triggered when the economy strengthens and inflation begins to rise. During QE, the Bank of England purchases government and corporate bonds from financial institutions to encourage them to lend; In QT, the Bank of England stops buying any more bonds, and stops reinvesting the capital owed on bonds it already holds. This is usually positive for the British pound.
