Pound to Dollar: December Outlook

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Strategists at international payments firm Convera say the month of December could bring with it a break above the key 1.28 level for the Pound to Dollar exchange rate (GBPUSD).

"The British pound has risen almost 5% against the US dollar in November, its biggest monthly rise since November last year. Trading above $1.27, this extends the winning streak of higher highs and higher lows to four consecutive sessions as USD weakness gathers pace," says George Vessey, Lead FX Strategist at Convera.

The Pound has rallied through November, helped by unmistakable signals from the Bank of England that UK interest rates won't be cut anytime soon, disappointing growing market expectations that as many as four rate cuts would be delivered in 2024.

Bets for rate cuts had eased UK monetary conditions and risked undoing the work of previous rate hikes, prompting key figures at the Bank of England to push back and warn interest rates will need to remain at 5.25% for an extended period.

"Although it's mostly US developments driving markets at present, some more hawkish commentary from the Bank of England this week has helped the pound. BoE policymakers pointed out that services inflation, which makes up 45% of the consumer inflation basket, is proving much stickier than expected and therefore interest rates would remain high for an extended period," says Vessey.

The Pound to Dollar exchange rate hit a peak at 1.2732 in early midweek trade as inventors recalibrated expectations, and Convera sees the potential for an extension beyond here.

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Money markets are still pricing around 60 basis points of policy easing from the UK central bank by the end of 2024, suggesting there might be further rate cut bets to be unwound, which could support Sterling.

Indeed, economists at HSBC reckon it won't be until 2025 that the Bank of England can deliver a first cut.

Gains for the Pound-Dollar pair also have a broadly weaker Dollar to thank. "The US dollar accelerated its tumble," says Charalampos Pissouros, Senior Investment Analyst at XM.com.

"This time, it was Fed Governor Chris Waller who pushed the greenback off a cliff as the normally hawkish policymaker made a surprise turn and said that if the decline in inflation continues for several more months, they could start lowering the policy rate," he explains.

December could see these themes continue if the incoming data in the U.S. and UK doesn't throw up any surprises.

Above: GBPUSD at weekly intervals showing the 200-week moving average.

From a technical perspective, Convera is looking to a key technical level as a potential target in the coming month.

"The 200-week moving average of GBP/USD is located at $1.2843 and given the positive momentum of the currency pair right now, we cannot rule out a test of this level in December," says Vessey.

But the rise in the Pound-Dollar exchange rate has now reached overextended proportions, according to the daily Relative Strength Index (RSI).

The RSI is now above the critical 70 level (see the lower panel in the above chart).

A move above 70 signals overbought, and we expect the RSI to revert into the 30-70 range as consolidation or retracement evolves in the Pound-Dollar exchange rate.

The rally has been fast and furious over the past few days, and it could now be time to see some calmer waters to allow the market to readjust, particularly as month end comes about.

"Similar to that of EUR/USD, the probability of a correction lower from these levels appears elevated given the overbought conditions on the daily relative strength index," says Vessey.