23.12.202501:11 Forex Analysis & Reviews: The Pound Benefits from Broad Dollar Weakness

The Bank of England lowered the interest rate last week by 0.25% to 3.75%, which aligned with forecasts. The votes were split 5-4, indicating a lack of consensus. The results of the meeting did not include new forecasts.

Following weak UK inflation data for November, there was a possibility that the number of votes for a rate cut would increase, suggesting the BoE was ready to shift toward a more dovish monetary policy. However, this did not happen; those voting against the cut pointed out to the Committee that wage growth remains too high, raising uncertainty about whether the current policy is restrictive and whether another inflation spike should be expected. The Committee remains divided, and the future trajectory of interest rates is unclear.

BoE Governor Bailey tried to remain neutral, with the general sentiment that further rate cuts will require additional signs of inflation slowing, suggesting the market is not expecting any automatic cuts. Everything will depend on incoming data. Given these considerations, it can be argued that the pound received support, as the December rate cut was priced in and another cut is now in serious doubt. Currently, the market expects one more rate cut next year—this time, the final one—bringing the rate down to 3.5%, but this is not expected to occur before April.

The intrigue here is that even with a significant decrease in inflation in November, two key indicators, namely wage growth and service prices, remain too high, increasing the likelihood of a "wage-price spiral" that will keep inflation above target levels. This conclusion seems evident, and the only question is how long this situation will persist.

Overall, neither the pound nor the dollar has strong reasons to strengthen. However, while the pound's situation is somewhat predictable, the dollar faces the risk of a more substantial decline. There may be an acceleration of capital outflows from U.S. assets, which could lead to a rapid economic downturn or even a stagflation shock. As long as the market does not revise its expectations, we will maintain a position wherein GBP/USD experiences weak bullish pressure.

Positioning for the pound is bearish, but short-term factors support a calculated price above the long-term average.

The pound has returned to the 1.3450/70 resistance zone, although in the previous review, we expressed doubts about whether it could reach it. Nevertheless, the overall weakness of the dollar played a role, and now the chances for the pound to continue rising appear stronger. We expect an attempt to break above 1.3470, with a further target of 1.3525, and if the upward momentum continues, we anticipate seeing GBP/USD near the resistance zone of 1.3620/40. Considering the thin market and reduced activity due to the holidays, the likelihood of rapid growth is low.