Pound Sterling: Damage to Technical Outlook say Analysts

January 3, 2025 - Written by Frank Davies

STORY LINK Pound Sterling: Damage to Technical Outlook say Analysts

The British Pound Sterling (currency:GBP) came under sustained pressure on Thursday, with the pound-to-dollar (GBP/USD) exchange rate sliding to 8-month lows just above 1.2350.

European currencies were sold heavily overall, while the dollar maintained a strong tone.

The Pound also continued its dismal new-year run with GBP/USD weakening on the first trading day for the seventh successive year.

There was limited relief on Friday with GBP/USD just above 1.2400.

MUFG considers that there has been damage to the technical outlook; “Taking the retracement level from the low in 2023 to the high last year, GBP/USD yesterday broke through the 61.8% retracement level pointing to technical factors behind the move as well.”

According to Scotiabank; “strongly bearish trend momentum indicate that risks are skewed towards a drop towards 1.2300, with scope for rebounds now likely limited to the upper 1.24s.”

In addition, MUFG pointed to concerns surrounding energy prices after Ukraine President Zelensky refused to renew a contract to ship Russian natural gas through Ukraine into Western Europe.

The bank also noted that colder weather conditions have increased gas demand and triggered a decline in storage levels to the lowest level for early January since 2021, increasing the risk of sustained upward pressure on prices.

MUFG also noted UK vulnerability to a surge in gas prices; “The UK’s lack of storage capacity leaves it more vulnerable to market price moves and has increased fears over further utility price increases this year.”

Higher energy prices will sap consumer spending power, undermine business confidence and increase costs.

A combination of weak spending and higher inflation would cause major difficulties for the Bank of England.

As far as UK data is concerned, mortgage approvals declined to 65,700 for November from a revised 68,100 the previous month and below consensus forecasts of 69,000.

There was also a decline in net lending to £3.4bn from £4.5bn the previous month.

MUFG considers that there will eventually be a dovish BoE shift which will hurt the Pound, “We see the pricing for BoE rate cuts this year as too cautious and expect the BoE to cut by more which will likely see the pound underperform non-dollar currencies later in the year with the US dollar by then weakening more broadly.”

Dollar trends will inevitably be crucial in the short term.

ING commented; “it’s worth reiterating our core views for this year. We expect Trump’s policy mix to trigger further dollar strengthening, with European currencies coming under pressure from protectionism and monetary easing.”

The bank added; “Now that seasonality turns positive, we’d need a U-turn in that narrative that has kept the dollar strong into year-end. A January cut would really require a slew of recession-sounding figures after the hawkish tilt in the December Dot Plot.

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TAGS: Pound Dollar Forecasts