British Pound Faces Headwinds Amid Technical Pressure and Economic Uncertainty
The British pound has entered December—historically one of its strongest months—on a weak footing. GBP/USD dropped nearly 1% on Monday, erasing part of last week’s 2% relief rally that briefly brought the pair back toward $1.28. Now trading closer to $1.26, the pair is testing its 100-week moving average for support.
Fresh tariff threats from U.S. President-elect Donald Trump over the weekend have bolstered the dollar, signalling a potentially more volatile foreign exchange environment in the years ahead. However, Trump’s comments could lead to unpredictable short-term price swings, with the longer-term trend possibly smoothing out in unforeseen ways. The only certainty is increased uncertainty.
Compounding the pound's struggles, UK economic data has softened significantly. Citi’s UK Economic Surprise Index has tumbled from +8 in mid-October to -47, reflecting a steady stream of disappointing figures. This has contributed to GBP/USD’s over 5% quarter-to-date decline. Adding to the gloom, British Retail Consortium data released this morning showed a 3.3% year-on-year drop in retail sales for November.
From a technical perspective, the pound remains under pressure as long as GBP/USD stays below its 200-day moving average, currently near $1.28. A sustained weekly close above this level would challenge the prevailing downtrend. However, a return to a more bullish outlook for the pound will likely require stronger UK economic data—a scenario that has yet to materialise.
European Markets Struggle Amid Political Uncertainty and Diverging Economic Prospects
The potential collapse of the French government is driving bond spreads and implied euro volatility to their highest levels this year. Political uncertainty surrounding France’s budget and Germany’s upcoming February election has left Europe’s two largest economies without majority governments capable of advancing key legislation. This paralysis is making the eurozone less flexible and the euro less appealing to foreign investors.
While European equities have benefitted from positive sentiment out of Asia—where investors reacted favourably to less severe U.S. restrictions on Chinese chips and AI components—the euro has borne the brunt of diverging growth trajectories and rising tariff expectations. The EUR/USD opened below the $1.05 mark, reflecting limited appetite to push the currency higher.
Prime Minister Michel Barnier’s contentious negotiations over the social security funding law could lead to the government’s collapse and the appointment of a new cabinet. The premium on French government bonds over German equivalents has reached 85 basis points, the highest since 2012.
