Anna 
The British Pound (GBP) is displaying resilience against the US Dollar (USD) as expectations of UK interest rate cuts in 2024 come to the forefront. The Bank of England (BoE) is anticipated to implement a series of rate cuts, with the first quarter-point reduction expected at the May Monetary Policy Committee (MPC) meeting. The dovish re-pricing is partly influenced by the recent UK inflation report, indicating a sharp decline in inflation rates. Some financial institutions project UK inflation at 3% by the end of the first half of the year, while others foresee it reaching the BoE’s target of 2% over the same period.
Lower inflation rates are deemed necessary to stimulate the UK economy, which is teetering on the edge of recession, according to the latest GDP statistics. The Office for National Statistics (ONS) released data revealing a contraction of 0.1% in the final quarter of 2023, missing expectations. The second-quarter GDP data was revised to a flat reading from the previous +0.2%.
Despite the anticipation of UK rate cuts, the British Pound is not weakening as expected, primarily due to similar plans by other major economies to reduce borrowing costs in 2024. The US, for instance, is expected to implement seven rate cuts next year, according to the latest CME Fed Fund expectations. This divergence in interest rate expectations is causing weakness in the US Dollar, benefitting the GBP/USD pair.
As of now, the GBP/USD pair is trading above 1.2700 and testing previous multi-month highs. A break and open above the recent high of 1.2794 could propel the pair toward the 23.6% Fibonacci retracement level at 1.2823, with further upside potential toward a prior small swing high just under 1.300.
Retail trader sentiment data for GBP/USD indicates that 48.44% of traders are net-long, with a short-to-long ratio of 1.06 to 1. While this data suggests potential upward movement in GBP/USD prices, a contrarian view would consider the possibility of continued increases.
Against the Euro, the Pound is facing resistance and attempting to break through the 50- and 200-day simple moving averages. The EUR/GBP pair has been trading within a range of 0.8500 to 0.8750 for the past eight months. The expectation is that this range will persist unless there are substantial changes in UK or EU rate expectations.
