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GBP/USD Under Pressure as Strong Dollar and Rate Cuts Loom

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icon 23/01/25
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GBP/USD Under Pressure as Strong Dollar and Rate Cuts Loom

The GBP/USD exchange rate is encountering significant headwinds as the US Dollar gains strength. This development comes amid expectations that the Federal Reserve will maintain its current interest rate levels in January. The Pound Sterling is under pressure, with market participants predicting a 25 basis point interest rate cut from the Bank of England in February.

During the Asian trading session on Thursday, the GBP/USD pair hovered around 1.2320, marking its second consecutive day of subdued performance. The strength of the US Dollar is bolstered by a recent memorandum from the White House calling for federal agencies to investigate and address ongoing trade deficits. With the Federal Reserve likely to keep its benchmark overnight rate stable in the range of 4.25% to 4.50% at the upcoming January meeting, the Greenback may continue to appreciate. Furthermore, potential inflationary effects from recent economic policies could constrain the Fed’s ability to enact multiple rate cuts in the near future.

In contrast, the Pound’s struggles are compounded by disappointing inflation and retail sales figures for December, as well as lackluster labor demand in the months leading up to November and modest GDP growth. In light of these economic indicators, forecasts suggest that the Bank of England will likely lower rates to 4.5% in its forthcoming policy meeting.

Market participants are especially attentive to the preliminary release of the S&P Global Purchasing Managers Index for both the UK and the US, set to be published on Friday. Additionally, the Michigan Consumer Sentiment Index from the US will also be scrutinized. These data points are expected to provide crucial insights into prevailing economic trends and shape market expectations moving forward.

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