The GBP/USD pair remained subdued on Friday, trading around 1.2520 during the Asian session for the third consecutive day. The downside pressure is largely attributed to thin trading activity following the Christmas holiday and a stronger US Dollar (USD), fueled by growing expectations of fewer rate cuts by the US Federal Reserve (Fed).
Fed’s Rate Cut Projections Weigh on GBP/USD
The Federal Reserve’s December meeting saw a quarter-point rate cut, along with a revision of its 2025 projection, which now includes only two rate cuts, down from the previously forecasted four. This shift in the Fed’s outlook, along with moderate US PCE inflation data, has tempered expectations for further aggressive rate cuts, supporting the US Dollar.
The US Dollar Index (DXY), which measures the value of the USD against six major currencies, is trading above 108.00, though slightly below its highest level since November 2022. However, the Greenback’s upside potential may be capped, as US Treasury bond yields remain subdued, with the 2-year and 10-year yields at 4.33% and 4.58%, respectively.
Pound Weakens Amid Dovish BoE Expectations
Meanwhile, the British Pound (GBP) has weakened against its major counterparts, as expectations grow for a dovish stance from the Bank of England (BoE) in 2025. In December, the BoE held its key interest rate steady at 4.75%, but a surprising split vote, with three policymakers supporting rate cuts, indicated a potential shift towards easing next year.
Market expectations for 2025 now include a 53-basis-point (bps) rate cut, up from the previously forecasted 46 bps. This adjustment follows a 6-3 vote by the BoE’s Monetary Policy Committee (MPC), with three members advocating for a 25 bps rate reduction. Investors have interpreted this as a signal of a more dovish approach from the BoE in the near future.
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