Calm Before the Storm, Pound Sterling Holds Firm on Thanksgiving Day

December 1, 2024 - Written by David Woodsmith

STORY LINK Calm Before the Storm, Pound Sterling Holds Firm on Thanksgiving Day

Relative calm has descended on markets with the US Thanksgiving Holiday curbing trading volumes, although there are still major underlying uncertainties and tensions with high volatility liable to return quickly.

The Pound to Euro (GBP/EUR) exchange rate has edged above the 1.2000 level in narrow ranges.

The Pound to Dollar (GBP/USD) exchange rate advanced to highs just above 1.2680 in early Europe before a retreat to just below 1.2650.

According to UoB; “The major resistance at 1.2755 is likely to be out of reach for now. On the downside, any intraday pullback is expected to face strong support at 1.2620, with minor support at 1.2640.”

The dollar lost ground on Wednesday with a significant element of position adjustment.

The US holiday will tend to dampen the flow of policy talk from the incoming Trump Administration which may help underpin risk appetite.

Geo-political developments will continue to be watched closely.

According to ING; “Some possible mild negatives exist from the Israeli-Hezbollah ceasefire opening the door for a calmer period in the Middle East and some softer US macro data next week building back expectations of a 25bp Fed rate cut in December.”

Position adjustment may also help support the Euro in the near term.

Credit Agricole noted; “Our corporate flow model is pointing to EUR buying at the end of the month.”

Speculation that the ECB will sanction an aggressive 50-point basis cut in December have also faded.

The latest Spanish data recorded an increase in inflation to 2.4% for November from 1.8% and slightly above consensus forecasts of 2.3%.

German data is also expected to show a monthly increase which will galvanise ECB hawks.

There are still important reservations surrounding the underlying Euro-Zone economic and political outlook.

According to ING; “we should be wary of developments in French politics. Marine Le Pen's faction may well pull the plug on Michel Barnier's government next week over a budget vote. The French-German sovereign 10-year sovereign bond spread has widened to levels last seen in 2012, which is worrying for the euro and a reminder that any chance of fiscal support from either France or Germany is remote.”

At this stage, markets expect the Bank of England will hold interest rates steady at 4.75% in December with yield positive for the Pound.

There are, however, reservations surrounding the UK economic outlook which will potentially hurt the currency.

The latest CBI survey, for example, recorded a sharp dip in business confidence.

According to the survey, optimism among consumer services businesses slumped to -55 in November from -19 in August and the weakest reading since August 2022 while business and professional services sentiment dipped sharply to -29 from +9.

CBI Deputy Chief Economist Alpesh Paleja commented; "Falling sentiment, weaker hiring intentions and firming cost pressures are all at least a partial response to the forthcoming rise in employer National Insurance Contributions."

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TAGS: Pound Sterling Forecasts