The GBP/USD exchange rate has shown an upward trend, trading close to 1.2580 during the Asian session on Monday. This increase marks the second consecutive day of gains for the pair, primarily driven by a weakening US Dollar amid lower trading volumes in anticipation of the New Year holiday.
Despite recent gains, the potential for further appreciation of the Pound Sterling could be limited. The US Federal Reserve has maintained a hawkish outlook, which is likely to support the US Dollar. Although the Fed recently implemented a 25 basis point cut to its benchmark interest rate during the December meeting, projections indicate two potential rate cuts in 2025. Statements from Fed officials suggest a cautious approach to future cuts, reinforcing the notion that the US Dollar may face less downward pressure in the near term.
Additionally, the Pound is under pressure from developments within the Bank of England. A recent split vote revealed that three policymakers were in favor of rate cuts, hinting at a quicker pace of monetary easing in 2025. During its December meeting, the BoE decided to keep interest rates steady at 4.75%, while stressing a gradual approach to future cuts. However, uncertainty in the economic landscape complicates the BoE’s ability to provide a definitive timeline or magnitude for future rate adjustments, leaving sentiment surrounding the Pound cautious.
As the market digests these dynamics, the GBP/USD pair could continue to face challenges from the Fed’s firm stance and the BoE’s shifting outlook. Current trends suggest that while the Pound may enjoy some short-term gains, underlying pressures could limit its long-term strength against the US Dollar.
