Sterling's Standoff: Navigating the Dollar Dominance

The pound edged higher against the dollar as it concluded a holiday-thinned trading week. Though weaker against the dollar for the third consecutive week, it's performed better than other major currencies. Bank of England's reduced rate cut pace underpins sterling's modest strength amid U.S. economic resilience.

Sterling ticked upward against the dollar as it wrapped up a holiday-shortened trading week, despite weakening over the past three weeks. On Friday, the pound rose 0.17% to $1.2546 after experiencing a slight drop earlier. So far this year, the pound has only fallen 1.5% against the greenback, outperforming other major currencies.

The Bank of England's cautious approach with rate cuts, reducing borrowing costs by just half a percentage point, has supported sterling. However, expectations of further cuts have pressured the pound recently, as a strong U.S. economy and hawkish Federal Reserve have driven up U.S. Treasury yields, boosting the dollar.

Traders currently anticipate 51.5 basis points of rate cuts from the BoE next year, compared to 46 bps before the bank's last policy meeting. Analyzing UK wage growth and inflation trends, Goldman Sachs notes the BoE's cautious stance, predicting continued rate reductions through 2025. Meanwhile, the euro gained slightly against the pound but remains weaker compared to early 2024 figures.

(With inputs from agencies.)