Sterling In Textbook New Year Slump

GBP/USD nears eight-month low amid Dollar strength

Sterling trades near an eight-month low of $1.2400 against the US Dollar as the Greenback extends its rally. Expectations for fewer Federal Reserve rate cuts this year continue to support the Dollar. The Fed’s latest dot plot projects the Federal Funds rate at 3.9% by end-2025, up from 3.4% in September.

Attention now turns to the US ISM Manufacturing PMI for December, expected to remain at 48.4, signaling continued contraction in the sector.

The Pound is pressured by weaker UK manufacturing PMI data and increased bets on Bank of England (BoE) rate cuts. December’s PMI dropped to 47.0 from a preliminary 47.3, with widespread declines across sectors. Rob Dobson of S&P Global noted, "Business sentiment is at its lowest for two years," with SMEs hit hardest by government policies. Traders now price in 60 bps of BoE rate cuts this year, up from 53 bps in late December.

GBP/USD falling below $1.2400, reinforces its bearish outlook. The pair trades below the October 2023 trendline at $1.2600, with all Exponential Moving Averages sloping downward. The 14-day RSI below 40.00 signals strong downside momentum.

Support lies near $1.2300, with resistance at $1.2500.

No Major Data

EUR/USD pressured by policy divergence and growth concerns

The Q4 2024 decline in EUR/USD was largely driven by the widening short-dated swap rate differential, reflecting diverging policy expectations between the Federal Reserve and the European Central Bank. Over the Christmas period, and especially during yesterday’s trading session, the EUR/USD drop accelerated despite a narrowing in the EUR:USD two-year swap rate gap from 200bp (on 12 December) to 185bp.

Estimation is that EUR/USD is currently trading about 2.5% below its short-term fair value, indicating a risk premium tied to Eurozone growth concerns. In addition to the anticipated impact of US protectionist policies under Trump, upward pressure on TTF gas prices—rising to 50 EUR/MWh due to Ukraine’s pipeline shutdown—is contributing to the strain. The Pound was yesterday’s worst performer, likely reflecting its position as the most negatively correlated with gas prices in the G10.

While technical signals suggest a potential short-term rebound in EUR/USD, the Euro remains broadly unattractive in the longer term. Another leg lower—possibly to the $1.0200 level—may be necessary before a sustained recovery takes hold.

No Major Data

Dollar strength to continue

Trump’s policy mix is expected to fuel further Dollar strength in 2025, while European currencies, particularly the Euro, face pressure from protectionism and monetary easing. Emerging market currencies are also likely to struggle.

The Dollar’s seasonal strength in January and February, coupled with last month’s 2.6% rise in the DXY, reflects strong macro and policy drivers. Unless recession-like data or a major narrative shift emerges, the Dollar should stay supported, with little immediate risk of a Fed rate cut.

Trump’s firm stance on protectionism and fiscal stimulus suggests continued Dollar resilience into his January 20 inauguration. A Plaza Accord 2.0 to weaken the Dollar remains unlikely, with Trump likely leveraging a strong Dollar in trade talks.

Jobless claims recently fell to 211k, and today’s ISM manufacturing index is expected to remain in contraction. While liquidity normalisation may cause minor Dollar dips, growth concerns and rising gas prices weigh on European FX, keeping DXY on track for 110.0.

Data:

3:00PM - ISM Manufacturing PMI