Volatile Year Ahead?
GBP/USD weakens to near $1.2500 on BoE dovish bets
The GBP/USD pair remains on the defensive around $1.2510 on Thursday during the Asian session, pressured by the stronger Dollar broadly. The prospect that the Federal Reserve will slow the easing cycle this year supports the Greenback against the Sterling. The Fed lowered the Federal Funds Rate to a range of 4.25% to 4.5% in its December meeting, down from its target range of 4.5% to 4.75%. Fed Chair Jerome Powell emphasised the need for caution on further rate reductions amid stubbornly high inflation. Powell said that the US central bankers anticipated a higher inflation outlook and fewer rate cuts next year. Fed officials penciled in only two rate cuts in 2025, down from the four it had forecast in September. On the other hand, a mild increase in the Bank of England's dovish bets this year drags the Cable lower. The BoE Governor Andrew Bailey signaled a “gradual” approach to interest rate cuts “remains right,” pushing back against market bets on fewer rate cuts in the coming year. Additionally, Bailey added that the uncertainty surrounding the geopolitical risks and trade policies ahead of Donald Trump’s return to the White House could weigh on the already-slowing UK economy, creating a headwind for the GBP.
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EUR/USD remains subdued around $1.0350
EUR/USD continues to lose ground for the fourth successive day, trading around €1.0350 during the Asian hours on Thursday. The Euro faces challenges as the European Central Bank maintains dovish guidance on interest rates policy for this year.
The ECB reduced its Deposit Facility rate by 100 basis points to 3% in 2024 and is expected to lower it further to 2%—considered the neutral rate—by the end of June 2025. This indicates that the central bank will likely cut its key borrowing rates by 25 bps at each meeting during the first half of this year.
On Wednesday, ECB President Christine Lagarde stated that the central bank aims to achieve its 2% inflation target by 2025. Lagarde remarked, “We made significant progress in 2024 in bringing down inflation, and we are hopeful that 2025 will be the year we reach our target, as expected and aligned with our strategy.” She added, “Of course, we will continue our efforts to ensure that inflation stabilizes sustainably at the 2% medium-term target.”
The US Dollar Index, which measures the value of the US Dollar against its six major peers, rebounded to multi-year highs and traded around 108.50 due to the US Federal Reserve’s (Fed) hawkish pivot.
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Dollar holds near multi-year highs
During the Asian trading hours, the data from China showed that the Caixin Manufacturing PMI declined to 50.5 n December from 51.5 in November, missing the market expectation of 51.7. Despite this disappointing reading, AUD/USD edges higher on Thursday and was last seen rising nearly 0.5% on the day at 0.6215.
XAU/USD holds its ground and trades above $2,630 to start the European session.
After reaching its highest level since July above ¥158.00 following the Christmas break, USD/JPY corrected lower toward the end of the year. The pair stays on the back foot in the European morning and was last seen losing about 0.3% on the day below 157.00.
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