We have been bearish of GBP/USD since it topped out at 1.3400 and we are now trading below 1.2600 despite the fall most forecasters remain bullish of sterling but the outlook as we come into 2025 is bearish in our view and we expect more downside...
In our last article when the GBP fell back from 1.3440, we postulated the Bank of England would cut rates more than the market expected You Can Read the Article Here and the argument still remains valid. While the GBP has fallen hard it still has plenty of downside and we are looking for a move to monthly support at 1.200.
Interest Rates
At its last meeting: “The Bank of England kept interest rates on hold as it warned UK growth is on the brink of stagnation amid the fallout from Rachel Reeves’s budget and threat of Donald Trump reigniting global trade wars.” (GUARDIAN NEWS)
UK interest rates have been held at 4.75%. In an unexpected split, three members of the nine-member rate-setting committee wanted to cut rates to 4.5% to boost growth. Rates are still expected to fall gradually next year, with the first cut coming in February.
Commenting on the decision, Bank governor Andrew Bailey said: "We think a gradual approach to future interest rate cuts remains right but with the heightened uncertainty in the economy we can't commit to when or by how much we will cut rates in the coming year." Mr Bailey said he thought the path for interest rates was "downwards", but added: "The world is too uncertain. We will return in February at our next meeting and review it [interest rates] again."
The vote split was 6 to 3 in favour of holding interest rates:
“We interpret this larger vote split as a signal to the market that the MPC is advocating a more rapid pace of cuts than currently priced in. The MPC also stuck to its language of gradualism. In our view, the path of least resistance remains for quarterly cuts. With three members already favoring cuts, only two more need to switch sides in February to mark the next move. We continue to expect the first cut of 2025 to land then.” ( RABOBANK)
The Bank of England has no choice but to slash interest rates to help an economy near recession and help struggling consumers. Many forecasters are pointing to services inflation still remaining elevated but the recent budget which we will talk about in more detail in a moment will send it down which will see the BoE cut rates.
Keep these Points in Mind!
The bullish argument for the GBP is based around high interest rates but it has not rallied on the market view its well down over the last few months – High interest rates and slowing growth are bearish the GBP NOT Bullish! Also if rates are cut, the market will see how bad it is in the UK (which ordinary people who live here already know) and send the GBP lower. Our view is we are going to get aggressive rate cuts more than the Fed to pressure the GBP as the economy is on the verge of recession...
UK Economy on the verge of Recession
The UK economy had zero growth between July and September and contracted in October.
One of the UK's leading business groups, the CBI, said its latest company survey suggested: "the economy is headed for the worst of all worlds".
The CBI, which represents 170,000 firms, said its survey based on responses of 899 firms between 25 November and 12 December, found private sector businesses across all industries expected a "steep decline in activity" in the first three months in 2025."Expectations are now at their weakest in over two years," (Alpesh Paleja, the CBI's interim deputy chief economist.)
A separate survey by the British Retail Consortium, which represents UK retailers ranging from Marks and Spencer to Tesco, suggested a "January spending squeeze on the horizon" for consumers. It noted: "public confidence in the state of the economy took a nosedive" this month, according to its consumer sentiment survey. "With sales growth unable to keep pace, retailers will have no choice but to raise prices or cut costs – closing stores and freezing recruitment," said Helen Dickinson, chief executive of the BRC.
Budget won't Work to Boost Growth
Businesses have already warned that measures announced in October's Budget including a rise in employer national insurance contributions (NICs) and a higher minimum wage could push them into cutting jobs and raising prices. While these measures don't come in until April businesses are already preparing measures in response.
The government announced tax rises worth just over £40bn which as we can see will hit householders and businesses which will help fund an increase in public spending worth just over £50bn. The government’s hope is that by taking more from the private sector now, it can rebuild the economy. The government’s hope is that by taking more from the private sector now, it can rebuild the fabric of the economy.
This is a risk. “A lot hinges on how well the government spends the money,” Paul Johnson director at the Institute for Fiscal Studies, said. Asking more from businesses and households may also weigh on growth - It will it's to little too late
Technical analysis
Our view of the key levels on the monthly and daily charts to look out for in terms of shorting the GBP - If you would like to see our daily analysis of GBP/USD with our exact levels of entry stop and target and also analysis of 14 other pairs on a daily basis go to our Members Center Click Here to View
