On Monday, December 23, the pound continued to weaken against the dollar, nearing the crucial psychological support level of 1.2500, last reported at 1.2531, with a slight daily decline of 0.03%. The main driver for the pound's decline was the strong rebound of the dollar. The dollar index rebounded to around 108.20 during the day, bolstered by the Federal Reserve's hawkish stance, keeping the overall outlook optimistic.
The Federal Reserve's Hawkish Stance Strengthens the Dollar
The Federal Reserve's recent policy guidance shows a continuing concern about inflation pressures and a robust labor market, prompting adjustments in future rate cut expectations. In the latest dot plot, the Fed anticipates only two rate cuts in 2025, down from the previously forecasted four. Moreover, according to CME FedWatch tools, traders widely expect the Fed to maintain rates in the range of 4.25%-4.50% in January next year.
Cleveland Fed President Loretta Mester emphasized the prudence of maintaining the current policy stance until inflation reverts back to the 2% target path. This hawkish tone continues to drive the dollar upward, exerting downward pressure on the pound.
The Bank of England's Dovish Expectations Weigh on the Pound
Expectations of dovish policies from the Bank of England have intensified the pound's weak performance. Traders currently expect the Bank of England to cut rates by a total of 53 basis points by 2025, higher than the previously expected 46 basis points. At the latest meeting of the Monetary Policy Committee (MPC), three out of nine members proposed a 25 basis point rate cut, exacerbating the market's pessimism about the Bank of England's policy outlook.
Analysts at Deutsche Bank further anticipate that the Bank of England may announce four rate cuts next year, with one in the first half and the remaining three in the second half. This persistent expectation of monetary easing adds pressure on the pound.
Weak Economic Data Amplifies Market Concerns
In addition to policy expectations, the weak performance of the UK economy has cast a shadow over the pound's prospects. Data from the Office for National Statistics (ONS) showed that the UK economy did not grow in the third quarter, in stark contrast to a 0.4% expansion in the second quarter, and below the previous estimate of 0.1% growth. The downward revision of growth expectations further intensified market concerns about the UK's economic outlook, coupled with the expectations of monetary easing, diminishing the pound's appeal.
Can the Pound Find Support in the Future?
Despite the dual pressures of dovish policy expectations and economic weakness in the short term, the Bank of England's rate cut expectations are still mild compared to those of the Federal Reserve and the European Central Bank. The market believes this might provide some long-term support for the pound. Furthermore, the pound could benefit from favorable policy stabilization after 2025. However, this outlook depends on the strength of the UK's economic recovery and changes in the global market environment.
With low forex market trading volumes due to this week's Christmas holiday, analysts expect the short-term movement of the pound against the dollar to remain subdued, yet market attention on the UK economy and policy direction remains undiminished. Whether the pound can escape its current predicament will require time and further policy adjustments.
