**GBP/USD Near 12-Week High as 3.75% BoE Rate Signals Caution, Dollar Slips**
*Based on the article by Skerdian Meta, originally published on FXLeaders*
The currency market remains active as the end of the year approaches, with GBP/USD attracting considerable attention from traders and investors. The British pound (GBP) has surged against the US dollar (USD), trading near a 12-week high. This movement reflects an evolving sentiment surrounding monetary policy both from the Bank of England (BoE) and the Federal Reserve (Fed), as well as changing risk appetite in the forex marketplace.
Below is an in-depth analysis of the forces shaping the GBP/USD pair, the role of recent economic data, perspectives on central bank policy directions, and outlooks from industry analysts.
**GBP/USD Rally: Recent Developments**
– The GBP/USD pair has approached its highest level in nearly three months, buoyed by persistent US dollar weakness and diminishing expectations of imminent interest rate cuts by the BoE.
– The pound has reacted positively to cautious yet supportive signals from the BoE, which appears committed to keeping rates elevated around 3.75% in an effort to anchor inflation expectations.
– Market participants are also digesting a broad decline in the US dollar, which has eased under the weight of dovish signals from the Fed and mixed economic data from the US.
**Key Factors Supporting GBP Strength**
1. **Bank of England’s Policy Stance**
– The BoE has signaled that interest rates are likely to remain “sufficiently restrictive” for a considerable period, with a policy rate of 3.75% remaining a central pillar in its fight against high inflation.
– While some members of the Monetary Policy Committee (MPC) acknowledge signs of cooling economic pressure, the majority favor caution. The central bank is wary of premature policy easing amid lingering inflation, especially in the services sector.
– Forward guidance from the BoE suggests that the bar for the first cut is high, particularly as wage growth and core inflation remain elevated relative to the bank’s 2% target.
– Markets have pared back expectations of multiple cuts in 2024, supporting the GBP as investors anticipate a more hawkish stance than previously forecast.
2. **US Dollar Under Pressure**
– The US dollar index (DXY) has softened in December, dragged lower by a growing market consensus that the Federal Reserve is done hiking rates and could turn to rate cuts by the second half of 2024.
– Softer US inflation readings and signals from Fed Chair Jerome Powell have reinforced dovish expectations, weakening the US dollar’s safe-haven appeal and supporting risk-sensitive currencies like the GBP.
– The ongoing “dollar smile” theory, wherein the USD tends to outperform during periods of strong US economic growth or global turmoil, is less pronounced as recent data points to moderating US momentum and fewer geopolitical shocks.
3. **Market Sentiment and Risk Appetite**
– As liquidity thins into the holiday season, increased risk appetite is reflected in equity market gains and a broad-based sell-off in the dollar.
– Investor sentiment remains constructive towards the pound, especially as the UK economy shows resilience and market worries about political instability in the UK recede (barring unforeseen events in early 2024).
**Economic Backdrop: UK and US Divergence**
– **UK Macro Indicators:**
– The UK has seen mixed economic data, but pressure on the BoE to cut rates has lessened as wage growth and services inflation persist above target.
– Core inflation, which strips out volatile food and energy prices, remains a concern for policymakers.
– While the UK economy faces headwinds from higher borrowing costs, labor market shortages and elevated wage settlements provide a cushion.
– UK GDP growth remains tepid, but fears of a deep recession have abated, lending support to the pound.
– **US Macro
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