Pound Sterling Rebounds on Month-end Flows

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Thin market conditions mean month-end flows are firmly in charge of FX markets.

Pound Sterling has jumped against the Euro and Dollar amidst flow-driven FX market action.

Month- and year-end position covering comes amidst traditionally thin volume market conditions, given many traders are still away from their desks.

Thin market conditions mean that what would normally be a limited move can be exaggerated. The current action is "perhaps indicative of year-end flows," says W. Brad Bechtel, Global Head of FX at Jefferies LLC.

At the time of writing, the Pound to Euro exchange rate has overturned the previous day's decline to trade 0.42% higher on the day at 1.2064. The Pound to Dollar exchange rate is half a per cent higher at 1.2579.

"GBP/USD exhibiting the same with a straight line higher in the London morning after the two-day break, and we are 1.2565 the high after 1.2505 the low. EUR/USD, GBP/USD attract the heaviest flows around quarter end and year-end," says Bechtel.

"We expect year-end related flows to continue to percolate into the market," he adds.

This could ensure markets stay choppy until the first real data points and developments of the new year hit the desks of traders returning from their holidays.

The Pound enters year-end, having deflated from multi-month highs against the Euro. The decline comes amidst a readjustment in expectations for the number of Bank of England interest rate cuts for the coming year.

The Bank indicated at its December policy update that it might cut interest rates more than markets were expecting as economic data was weakening.

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The guidance has led some analysts to warn of near-term downside risks as investors moved to 'price in' more rate cuts for the coming year, and economists say the Bank will be keen to cut on at least four occasions.

Such an adjustment leans against Pound appreciation. "Risks are tilted in a dovish direction. This implies further modest downside risks for the pound into year-end," says Sheryl Dong, an analyst at Barclays.

Next week brings some second-tier data, and analysts will watch for fresh signs of a slowdown.

Noah Buffam, an analyst at CIBC Capital Markets, says he will be looking for evidence of easing inflationary and wage pressures in the REC report on jobs and the Bank of England's Decision Makers Panel survey. "While growth has eased, wage and price pressures have continued, and as a result we are seeing increased dispersion among BoE views. Should the data converge, we are likely to see a consensus emerge. This will be key to determining GBP directionality, but as it stands today, BoE pricing looks slightly hawkish."

Although price action is proving soft at the turn of the year, the Pound remains in a medium-term uptrend against the Euro, which can resume in the new year and potentially introduce new multi-year highs for euro buyers.

Barclays maintains a constructive outlook for the GBP versus the EUR on big macro trends (such as tariff resilience, EU-UK reconvergence and the pound's carry appeal).

"Longer term, we remain constructive and continue to forecast a grind for EURGBP towards 0.80 in coming quarters on big macro trends," says Dong.

"These trends include the relative tariff resilience versus the eurozone thanks to a trade deficit in goods with the US; structural supply side improvements from closer EU-UK ties; and a persistent carry advantage thanks to a slower-cutting cycle by the BOE that will likely be sustained for a while in light of ample fiscal easing in 2025," she adds.

EURGBP at 0.80 would give a GBPEUR of 1.25.