The anticipated pace of interest rate cuts is escalating in the market for the upcoming year, driven by decreasing inflation and a shift in focus toward stimulating economic growth by central banks.

The Bank of England is convening this week, and the current expectation is for no changes until approximately mid-2024, marking the commencement of a rate-cutting cycle. Presently, markets are factoring in nearly 75 basis points of cuts.

Despite the Bank's commitment to a 'higher for longer' approach, supporting the strength of the pound, we anticipate a divided vote on the rate decision.

In the United States, the recent release of weaker job data has reinforced the belief that the Federal Reserve will need to implement aggressive rate cuts starting early next year to counteract a weakening economy. No policy changes are expected at this week's meeting.

The highly significant US payrolls data, scheduled for today, serves as a crucial indicator of the underlying economic performance and holds substantial influence over central bank policy, potentially contributing to short-term volatility.

The European Central Bank is also set to convene this week, and it is anticipated to maintain its current stance. Market forecasts suggest they might be the first to initiate monetary policy easing, possibly as early as March, given the ongoing disappointing economic data and the drag from the weakening growth outlook for China on the European economy.

Geopolitical factors are increasingly becoming a key driver of market sentiment for the upcoming year, as evidenced by Gold reaching a record high this week.

As we approach year-end, liquidity is expected to diminish, potentially resulting in exaggerated market movements.

A stronger-than-expected U.S. labor market report bolstered the USD's performance heading into the weekend.  Following the announcement that the U.S. added 199,000 non-farm jobs in November, surpassing the market's projection of 180,000 and showing a significant increase from October's 150,000, GBP/USD exchange rate dropped by two-thirds of a percent.

The USD gained ground as market expectations for the first U.S. Federal Reserve rate cut in 2024 diminished, leading to support for bond yields.  Contrary to expectations of an unchanged figure, the unemployment rate decreased from 3.9% to 3.7%.  In order for the Federal Reserve to contemplate reducing interest rates in the upcoming months, policymakers will probably need to observe an increase in the unemployment rate, as this signals a relaxation in labor market conditions.

However, the employment market is currently constrained, and there are also unexpected developments in wages: average hourly earnings experienced a 0.4% month-on-month increase in November, surpassing the anticipated 0.3% and accelerating from October's 0.2%.

The Federal Reserve may express concern that the tight labor market is keeping wage levels elevated, thereby ensuring that inflation remains above the 2.0% target for an extended period.

The data will reinforce the Federal Reserve's communication that interest rates need to remain elevated for an extended period, providing support to U.S. yields and the USD. While the data doesn't indicate any significant change to be anticipated from the Fed, it is sufficient to affirm that the recent upward trend in the GBP/USD pair has come to an end, at least for the time being.

Governor Andrew Bailey continues to express apprehension about the supply side of economic growth. He reaffirmed the central bank's commitment to taking necessary measures to bring inflation back to the 2% target. However, he cautioned that the descent from the current 4.6% inflation rate could be gradual, leading to the persistence of elevated interest rates.

Recent data from the Bank of England reveals that mortgage approvals increased to approximately 47,400 in October. Despite this, mortgage approvals have declined by over a third since August 2022.

In the United States, Federal Reserve officials hinted at the possibility of interest rate cuts. US Fed Governor Christopher Waller, speaking at an event hosted by the American Enterprise Institute, suggested that if positive economic progress continues for several more months, the Fed might consider lowering policy rates next year, especially if inflation continues its downward trend.

Meanwhile, in the Eurozone, inflation showed a more significant-than-expected slowdown, bringing the 2% target into view. Investors are increasingly speculating that the European Central Bank will implement interest rate cuts sooner than previously indicated by officials. Consumer prices in November rose by 2.4% year-on-year, down from the previous month's 2.9% and below economists' predictions. There is growing anticipation that the ECB could initiate rate cuts as early as April 24.

The GBP/USD pair surpassed the 1.2700 on Friday, reaching its highest point since mid-August 23. In contrast, the GBP/EUR pair continues to fluctuate within the established 1.1500 – 1.1600 range.

No major UK or Eurozone calendar events this week, with UK Final Services PMI on Tuesday the only point of note.  From the US, the focus with be the employment data on Thursday and Friday.

The USD is undergoing a broad decline, reaching a level unseen in over three months against GBP.  Christopher Waller, a Federal Reserve Governor and prominent advocate for stricter monetary policies, suggested the potential for a future reduction in interest rates on Tuesday. This statement has sparked market speculation that interest rates in the United States might have peaked.

Rate futures in the US are now signalling a 33% chance of a rate cut in March, a significant increase from the 21% probability observed late on Monday. Furthermore, the likelihood of a rate reduction in May has surged to around 65%, up from approximately 50%.

GBP/USD has also been supported by clear signals from the Bank of England indicating that there won't be any imminent cuts to UK interest rates, this has dashed the increasing market expectations that up to four rate reductions would be implemented in 2024.

The waning bets on rate cuts had softened UK monetary conditions, posing a risk of undoing the impact of prior rate hikes. Consequently, influential figures at the Bank of England have resisted this trend, emphasizing the necessity for interest rates to stay at 5.25% for an extended duration.

If the incoming data in the U.S. and UK doesn't reveal any surprises, these trends could persist through December, with the next major level of resistance at the key 1.28 level for the GBP/USD.