The GBP/USD pair continued its upward momentum on Monday, reaching around 1.2580 during the Asian session, marking a second consecutive day of gains. This movement is largely attributed to a weaker US Dollar (USD), as trading volumes remained light ahead of the New Year holiday.
However, the potential for further upside in GBP/USD may be limited as markets digest the US Federal Reserve’s (Fed) hawkish outlook. Despite a 25 basis point rate cut in December, the Fed’s latest Dot Plot projections indicate two additional rate cuts in 2025, maintaining a cautious market sentiment.
Fed Chair Jerome Powell reinforced this caution earlier this month, stating that officials would “be cautious about further cuts” after the expected quarter-point reduction. The Fed’s cautious tone is likely to continue supporting the USD, potentially acting as a headwind for the GBP/USD pair in the near term.
Additionally, the Pound Sterling (GBP) faces challenges from a surprise split vote within the Bank of England (BoE), where three policymakers expressed support for rate cuts. This division suggests the possibility of a faster pace of easing in 2025, which could weigh on the GBP.
At its December meeting, the BoE decided to keep interest rates steady at 4.75%, while signaling “gradual” rate cuts in the coming year. BoE Governor Andrew Bailey noted that while a gradual approach remains appropriate, the BoE cannot yet commit to specific timing or amounts for rate reductions, given the prevailing economic uncertainty.
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