The GBP/USD pair began the new week with a subdued tone, trading within a narrow range above the mid-1.2500s during the Asian session. While Friday’s bounce from the 1.2475 level, the lowest point since May, raised some optimism, the current fundamental landscape suggests caution before betting on further gains.
The US Dollar (USD) pulled back from a two-year high on Friday, following the release of the November Personal Consumption Expenditure (PCE) Price Index, which indicated signs of inflation moderation and persistent economic challenges. This has somewhat eased the upward pressure on the USD, offering temporary support to the GBP/USD pair. However, the Federal Reserve’s (Fed) hawkish stance may continue to provide tailwinds for the USD, limiting upside potential for the British Pound (GBP).
Last Wednesday, the Fed lowered borrowing costs by 25 basis points (bps), as expected, but signaled a slower pace of rate cuts in 2025. This move supports elevated US Treasury yields, and with ongoing geopolitical risks, including the Russia-Ukraine war and tensions in the Middle East, the USD remains supported. These factors could fuel dip-buying of the USD and cap gains for the GBP/USD pair.
BoE’s Dovish Stance Limits GBP/USD Potential
The Bank of England (BoE) last week kept interest rates unchanged, following a split vote. Three members of the BoE’s Monetary Policy Committee (MPC) even voted for a rate reduction. Additionally, the BoE downgraded its economic forecast for the fourth quarter of 2024, which may discourage aggressive bullish positioning on the British Pound.
Looking ahead, market participants will closely monitor the BoE’s Quarterly Bulletin and the US Consumer Confidence Index, set to be released later during the North American session, for further guidance. However, the current macroeconomic backdrop, with mixed signals from both the Fed and the BoE, suggests that GBP/USD traders should wait for stronger confirmation before concluding that the pair has bottomed out.
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