In the absence of significant macroeconomic drivers for the GBP this week, it remains fundamentally supported ahead of the December meeting. Meanwhile, the focus shifts to the US CPI data today, which could provide clarity on the Fed's direction for December. Unless there is an unexpected upside surprise in the CPI, a 25bps rate cut is anticipated.

GBP: Best performance in G10

The outlook for GBP remains bullish, supported by strong domestic and external factors, with no significant changes in the current forecast. October's inflation data, particularly persistent services inflation, reinforces the Bank of England's (BoE) "gradual cut" approach, suggesting a likely hold on rates in December. The robust UK labor market, marked by strong wage growth, continues to exert moderate inflationary pressures, supporting a delayed easing cycle. Additionally, recent fiscal stimulus, equivalent to 1% of GDP, is expected to boost domestic demand, further postponing the need for monetary policy adjustments. The UK’s lower exposure to trade tariffs and its services-driven economy provide resilience compared to the Eurozone, enhancing GBP's relative appeal. Improved UK-EU relations also offer structural support for a stronger GBP in the longer term.

Last week, BoE Governor Bailey commented on rate cuts, suggesting four cuts next year—slightly more than market expectations of 3.5 cuts. While this initially applied some bearish pressure on GBP, the impact faded as the market interpreted it more as a reflection of pricing dynamics than his personal outlook. The recovery in GBP was further supported by upward revisions to final PMI readings, particularly the Services and Composite indices, with the latter rising to 50.5 from a contractionary 49.9 in the flash estimate.

BoE member Greene also highlighted uncertainty around the impact of US tariffs on UK inflation. However, the UK's trade structure, with a smaller share of GDP tied to services exports vulnerable to tariffs, positions GBP to weather trade-related shocks better than the Eurozone. Additionally, the UK's small trade surplus with the US reduces exposure to potential US tariff measures, bolstering GBP resilience amid global uncertainties.

Looking ahead, the GBP calendar is relatively light, with October GDP data being the main focus. While this is secondary for the BoE, any negative surprises could increase expectations for rate cuts in 2025 but are unlikely to alter December's outlook. Overall, barring unexpected domestic data, GBP's direction will remain driven by global risk sentiment and recent BoE member narratives.

USD: Awaiting for CPI

The narrative surrounding the USD has shifted from the optimism of "Trump trades" to a focus on the Federal Reserve's December policy meeting, as much of the positivity following Trump’s election victory appears to be priced in. Market attention has turned to U.S. economic data, particularly the November payrolls, which have influenced expectations for monetary policy. The report showed a rise in the unemployment rate to 4.2% from 4.1%, a clean data point unaffected by temporary disruptions like the Boeing strike and hurricanes, despite a stronger headline job gain of 227k from October's revised 36k. Wage growth was slightly higher than expected, but the latest Fed minutes suggest that wage pressures are unlikely to drive inflation in the near term. As a result, market pricing for a 25bps rate cut in December has risen to 87%, up from 72% before the report.

While expectations for a December rate cut have increased, it is too soon to conclude that the USD is poised to weaken, as key data, particularly next week’s CPI report, will play a critical role. The October CPI, which aligned with expectations, kept the Fed on track for a potential 25bps cut in December, but a sticky November inflation reading could shift the narrative. If inflation surprises to the upside, it could provide new momentum for USD strength heading into 2025, aligning with recent commentary from Powell and FOMC members like Mary Daly and Alberto Musalem, who have advocated for a slower pace of rate cuts. Conversely, a softer CPI print would reinforce market confidence in the Fed’s easing path in December.

Overall, while the USD faces near-term pressure ahead of the CPI release due to the perceived ‘dovish’ payroll data, any weakness could be short-lived. A strong inflation reading, combined with potential growth-boosting policies under Trump’s administration in 2025, could offer a catalyst for renewed USD strength.

GBP/USD 4H Chart

Disclaimer

This material is provided for informational purposes only and does not constitute financial, investment, or other advice. The opinions expressed in this material are those of the author and do not necessarily reflect the views of Trive International. No opinion contained in this material constitutes a recommendation by Trive International or its author regarding any particular investment, transaction, or investment strategy. This material should not be relied upon in making any investment decision.

The information provided does not consider the individual investment objectives, financial situation, or needs of any specific investor. Investors should seek independent financial advice tailored to their individual circumstances before making any investment decisions. Trive International shall not be liable for any loss, damage, or injury arising directly or indirectly from the use of this information or from any action or decision taken as a result of using this material.

Trive International may or may not have a financial interest in the companies or securities mentioned. The value of investments may fluctuate, and investors may not get back the amount they originally invested. Past performance is not indicative of future results.

For more information about Trive International, please visit http://trive.com/int

Additional Information

Investing involves risk, including the potential loss of principal. Diversification and asset allocation strategies do not ensure a profit or guarantee against loss. The content in this material is subject to change without notice and may become outdated or inaccurate over time. Trive International does not undertake any obligation to update the information in this material.

By accessing this material, you acknowledge and agree to the terms of this disclaimer. If you do not agree with these terms, please refrain from using this information.