Sterling remains under pressure as rising UK inflation complicates the European Central Bank’s policy outlook, with markets reducing rate cut expectations for 2025 due to continued price pressures and concerns about wage growth. All eyes are on today’s Federal Reserve decision, where a 25 basis point rate cut appears almost certain, which could add downward pressure on the cable as policy divergence between the Fed and the BOE is widening.
Key Market Statistics:
- UK CPI rises to 2.6% in November (compared to 2.3% in October).
- Services inflation remains stable at 5.0%.
- Core inflation rises to 3.5% (from 3.3%)
- GBP/USD is trading around 1.27
Rate cut expectations
Sterling’s move reflects a growing recognition by markets that the BOE faces more complex politics than its global counterparts. While traders had previously forecast three rate cuts for 2025, expectations have now shifted to just two cuts, highlighting the stubborn nature of UK inflation compared to other major economies.
Rates cut in 2025 after yesterday’s data. Source : Bloomberg
Services sector and wage pressures
Maintaining high inflation in the services sector at 5.0% (above the Bank of England’s projection of 4.9%), coupled with an acceleration in wage growth to 5.2%, suggests persistent pressures on domestic prices. “Core” underlying services inflation, which excludes volatile components, rose to 5.3% from 5.1%, indicating broader inflationary pressures.
Contributions to the UK CPI in November. Source : Bloomberg
Emerging political divergence
While the Fed and the ECB appear more and more open to rate cuts, the BOE seems able to maintain a firmer stance. Markets are currently pricing in easing through 2025 at around 60 basis points, with the probability of a reduction in February at around 60%. This policy divergence could provide some support for the British pound, although concerns over economic growth may limit upside potential.
Decrease in market-implied interest rates. Source : Bloomberg
Outlook for 2025
The combination of stagnant inflation, a tight labor market and the potential impacts of the Labor government’s fiscal policy suggests the BOE will likely maintain a cautious approach to monetary policy easing. Analysts now expect the discount rate to end 2025 at 3.75%, reflecting a measured quarterly pace of cuts rather than the more aggressive easing previously anticipated.
The complex interplay between persistent inflation, wage pressures and growth concerns points to continued volatility in sterling pairs through early 2025, with policy divergence remaining a key driver of moves. of currencies.
GBPUSD (Intervals D1)
The GBPUSD pair is currently trading below the 23.6% Fibonacci retracement level, a key inflection point that has held strong for over 19 trading days, leading to breakouts and signaling very strong resistance.
For the bulls, the main target is the 38.2% Fibonacci retracement level at 1.28484, with the first challenge being a successful breakout above the 50-day SMA. Conversely, bears will aim for the November lows at 1.24866 as their main target.
The RSI shows a slight bearish divergence with lower highs, but remains in the neutral zone, not providing a definitive signal. Likewise, the MACD remained tight for several days, reflecting market indecision and the lack of a clear directional bias. Source: xStation
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