The GBP/USD exchange rate broke through the key support line and reached its lowest level of 1.2352 since April 2024.

GBPUSD fell at a time when sterling was generally weak, which was related to the decline in UK bond yields. The decline in UK two-year bond yields is a signal that investors expect the Bank of England's interest rate cut in 2025 to be higher than expected in the closing stage of 2024.

However, at the beginning of 2025, the real story of the foreign exchange market lies in the US dollar.

Charalampos Pissouros, senior market analyst at XM.com, said, "The fundamentals of the US dollar have not changed. The hawkish Federal Reserve has reduced its expectations of interest rate cuts, implying that it will only cut rates twice by 25 basis points until December, which has led to a narrowing of the yield gap between the US and other major economies, whose central banks are leaning towards a more moderate stance starting at the end of 2024

Figure: Daily chart of GBP/USD on January 2, 2025 (the next obvious graphic target is located directly above 1.23)

The downward trend seems to be a continuation of the central bank divergence that has dominated the trend since October, when stronger than expected US economic data first triggered a rise in the US dollar.

The glory of the US economy prompted the market to reassess US interest rate policy, which reached its climax in the Federal Reserve's "hawkish" guidance in December. At the same time, the slowdown of the UK economy prompted the Bank of England to formulate more "moderate" guidelines at its December policy meeting.

The Federal Reserve cut interest rates in December, but hinted that there may only be two more cuts in 2025. This puts the Federal Reserve in a slow lane on the issue of interest rate cuts, which will boost the US dollar.

Meanwhile, the Bank of England kept interest rates unchanged in December, but three out of nine members of the Monetary Policy Committee (MPC) voted to cut rates, suggesting that the pace of rate cuts may accelerate this year.

Some analysts believe that the Federal Reserve may cut interest rates again. This means that the current trend of interest rate cuts may continue to push up the US dollar, just as the pound is facing forces in the opposite direction.

January is also traditionally a favorable period for the US dollar, which means that the dollar may also benefit from seasonal gains at the beginning of the year.

Market analyst Martin Miller stated that the US dollar is expected to further strengthen in January due to a combination of seasonal, fundamental, and technical factors.

He said, "Foreign exchange traders should note that the US dollar usually has demand at the beginning of each year. Analysis of the performance of the US dollar index in January since 2000 shows that the index has risen in 15 out of the past 25 years

The rise in US bond yields has always been favorable for the US dollar, with the benchmark 10-year period hitting a more than seven month high last week, which will prompt the pound to seek a several month low against the US dollar.