GBP/USD nears three-month high amid Fed rate cut bets

The US dollar trended lower on Friday as it was undermined by speculation the Federal Reserve may cut interest rates next year.

Meanwhile, the pound is mostly rangebound at the start of this week, with GBP/EUR flat at €1.1515 and GBP/USD stable at $1.2612. GBP/CAD is muted at CA$1.7188, while GBP/AUD holds steady at AU$1.9144 and GBP/NZD ticks up to NZ$2.0734.

Looking ahead, will an underwhelming UK retail report place pressure on Sterling later this morning?

What’s been happening?

The US dollar closed last week’s session on the back foot amid dovish Federal Reserve interest rate expectations.

There is growing speculation that the Fed will begin to cut interest rates in 2024, which was reinforced by the latest US PMIs.

November’s S&P PMIs suggested the US private sector remained close to stagnation, following a surprising contraction in manufacturing sector growth.

The euro also faced resistance on Friday with the publication of Germany’s latest business climate index. As morale in the Eurozone’s largest economy improved at a slower-than-expected pace this month.

Finally, the pound was able to strengthen at the end of last week as the increasingly risk-sensitive currency was underpinned by risk-on flows as well as some hawkish comments from Bank of England (BoE) Chief Economist Huw Pill.

What’s coming up?

Turning to this week, the only notable data release at the start of the session will be the publication of the Confederation of British Industry’s (CBI) distributive trades index.

November’s index could act as a drag on the pound this morning if it reports that activity in the UK’s retail sector remained weak, despite the start of the holiday season.

In the absence of any notable US economic data, movement in the US dollar is likely to be tied to market risk appetite today. If the risk-on mood carries through into this week it’s likely the US dollar could test new lows.

Meanwhile, volatility in the euro may be limited at the start of this week’s session as EUR investors await the publication of the Eurozone’s latest inflation figures later in the week.