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GBP/USD Slumps to 1-Year Low on Fears of UK Government Policy Risks
GBP/USD: The Pound Plunges to 1-Year Low
The pound plummeted to a one-year low against the US dollar on Thursday, fuelled by concerns over the UK government’s lack of credibility and wavering policy direction.
The UK government’s handling of inflation, interest rates, and economic growth has come under intense scrutiny, leading investors to question the pound’s long-term prospects.
One of the key factors driving the pound’s decline is the UK’s faltering economic growth. The country’s GDP is expected to contract in the short term, with the Office for National Statistics (ONS) predicting a 0.1% drop in the fourth quarter of 2024. This lack of economic momentum has led to concerns over the UK’s ability to implement effective monetary policy, further eroding investor confidence in the pound.
Another factor influencing the pound’s value is the UK’s inflation crisis. The country’s Consumer Price Index (CPI) soared to a 10-year high in December 2024, with prices rising by 10.2% on an annual basis. The Bank of England (BoE) has responded by hiking interest rates, but the effectiveness of these moves is still uncertain. As inflation persists, the pound may continue to struggle against its major currency counterparts.
AUD/USD: The Aussie Dollar Dips on Weaker Retail Sales
Across the Pacific, the Australian dollar dipped on disappointing retail sales data. The Australian Bureau of Statistics (ABS) reported a 0.4% decline in retail sales during November 2024, with economists warning of a potential slowdown in the country’s consumer-driven economy.
The decline in retail sales has sparked concerns over the Australian economy’s sensitivity to global trends. As the global economy slows, Australian exports and employment may struggle to maintain their momentum. This could lead to a depreciation in the value of the Aussie dollar, making it a less attractive currency for foreign investors.
FOMC Minutes: A Cautious Take on Inflation
Meanwhile, the minutes of the Fed’s December 2024 FOMC meeting offered some insight into the central bank’s inflation vigilance. While Fed officials acknowledged that inflation has returned to normal levels, they expressed concerns over the potential for long-term inflation pressures.
The minutes highlighted the Fed’s ongoing commitment to its 2% inflation target, with officials reaffirming their intention to maintain a cautious approach to monetary policy. The Fed’s willingness to gradually raise interest rates to combat inflationary pressures could have implications for the dollar, particularly against currencies with less robust monetary policies.
Global Stock Markets Mostly Lower
As the global economy slows, investors are becoming increasingly risk-averse, leading to a downturn in stock markets worldwide. The major indices, including the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite, all traded lower on Thursday, as concerns over earnings growth and economic growth persisted.
The gloomy stock market mood was reflected in the performance of other asset classes, including commodities and bonds. Oil prices dipped on increased concerns over global demand, while bond yields fell as investors sought safety in government debt.
Forex Outlook: What to Expect in the Coming Days
For the pound, it’s likely that the downward trend will continue unless the UK government can demonstrate a clearer policy direction and a more effective approach to dealing with inflation. In the meantime, the dollar may continue to benefit from its reputation as a safe-haven currency.
The Aussie dollar may struggle to regain its momentum, particularly if the country’s economy shows signs of slowing. Investors may also be cautious about allocating funds to the currency, given its close ties to the commodities market and the potential for a slowdown in global demand.
For the dollar, the FOMC minutes provided some clarity on the Fed’s inflation outlook, but the market may still be cautious about making bets on the currency’s direction. The dollar may continue to trade within a narrow range, as investors parse the implications of the Fed’s cautious approach to monetary policy.
