Key Points:
The British pound saw a pullback retreating from its recent gains against the U.S. dollar. Despite this decline, the pound remains close to its 2024 high of $1.3269. For enthusiasts, limiting the decline to a shallow slide could signal a growing bid for cable, especially given the underlying support from rate differentials.
Picture: GBPUSD price eased from 2024 high, as observed on the VT Markets app.
The recent strength has been driven by expectations of divergent rate paths between the Bank of England (BoE) and the Federal Reserve. Currently, Short-Term Interest Rate (STIR) futures are pricing in a more dovish Fed, with markets anticipating a 103 basis point easing by the U.S. central bank in 2024. In contrast, even though the BoE is expected to start its easing cycle earlier, it is only projected to ease by 66 basis points this year.
Looking further ahead, the market is discounting a total of 226 basis points in Fed easing by the end of 2025, compared to a further 131 basis points by the BoE over the same period. This divergence provides a structural tailwind for sterling, which has helped it maintain its position near recent highs.
Related article: Interest rate tug-of-war for central banks
However, there are risks to this outlook. If market assumptions about the extent of Fed dovishness prove to be overly optimistic, the U.S. dollar could receive a broad-based boost. Such a development would likely put pressure on GBPUSD, making the upcoming U.S. economic data crucial for determining the Fed’s policy trajectory and, by extension, the direction of the GBPUSD currency pair.
Market outlook for the British pound
For short-term traders, the current pullback in sterling could present a good entry point, provided the decline remains shallow. The key risk to watch is the upcoming U.S. inflation and payrolls data, which could significantly impact market expectations for Fed policy. A stronger-than-expected inflation reading or robust jobs report could prompt a reassessment of the dovish Fed outlook, leading to a dollar rally that might weigh on GBPUSD. Conversely, if the data supports the case for a more dovish Fed, sterling could resume its upward trajectory, especially if the BoE maintains a more cautious approach to easing. Traders should stay nimble and be prepared to adjust positions based on these key data releases and their implications for rate differentials.
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