UK Reservations Dampen Sterling Support, Pound to Dollar Exchange Rate Rallies

January 6, 2025 - Written by Tim Boyer

STORY LINK UK Reservations Dampen Sterling Support, Pound to Dollar Exchange Rate Rallies

After hitting 8-month lows near 1.2350 last week, the Pound to Dollar (GBP/USD) exchange rate has rallied to 1.2475 amid a wider dollar corrective retreat against European currencies.

There are important US data releases this week, culminating in Friday’s employment report.

ING commented; “This week will see a return of normal market conditions and a pick-up in FX liquidity. That may lead to some softening in the dollar’s momentum, as the greenback could reconnect with the slight deterioration in its rate advantage over the holiday period.”

It added; “But while technical factors signal that the dollar rally at the start of the year is overdone, the proximity to Donald Trump’s presidential inauguration should prevent a substantial rotation away from defensive dollar longs.”

The Pound to Euro (GBP/EUR) exchange rate edged lower to 1.2050.

Doubts over the UK economy will still tend to stifle the potential for a sustained Pound rebound while the Euro-Zone services-sector data offered some hope.

The UK PMI services-sector index was revised lower to 51.1 for December from the flash reading of 51.4, but still slightly above the November reading of 50.8.

Employment declined for the third successive month and at the fastest rate since the beginning of 2021.

Tim Moore, Economics Director at S&P Global Market Intelligence, said: "Faced with subdued demand conditions and hikes to employment costs, many service providers opted to curtail their staff hiring and delay backfilling roles in December.”

Input prices increased at the fast rate for nine months while charges increased at the fastest rate for six months.

Moore added; “Prices charged inflation meanwhile intensified at the end of last year and remained well in excess of pre-pandemic trends.”

The latest British Chambers of Commerce (BCC) survey recorded a decline in business confidence to a 2-year low.

Specifically, 63% of firms were worried about tax, the highest figure since 2017.

More than half of companies also expect to increase prices over the next three months.

BCC's director general Shevaun Haviland commented; "The worrying reverberations of the Budget are clear to see in our survey data.”

He added; “Firms of all shapes and sizes are telling us the national insurance hike is particularly damaging. Businesses are already cutting back on investment and say they will have to put up prices in the coming months."

The Euro-Zone PMI services-sector index was revised higher to a 2-month high of 51.6 for December from the flash reading of 51.4 and compared with 49.5 in November.

Input costs and output charges increased for the third month running to hit five and seven-month highs, respectively.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank commented; “Service providers can count themselves lucky that, unlike manufacturers, they're not directly affected by the threat of US tariffs. Overall, they should help ensure that industrial weakness doesn't completely drag down the entire economy in 2025.”

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TAGS: Pound Dollar Forecasts