In recent weeks, the performance of the foreign exchange market has been capturing significant attention, particularly with regard to the British poundThe release of the UK's Purchasing Managers' Index (PMI) data has provided a boost to the pound, fueling speculation about its strengthHowever, as the markets brace for the forthcoming interest rate decisions from both the U.SFederal Reserve and the Bank of England, a fierce battle is brewing between bulls and bears over which direction the pound will takeThe stakes are high, and all eyes are on the market to see which side will prevail in this high-stakes contest.

The PMI data for the UK revealed robust expansion within the services sector, which momentarily propelled the GBP/USD exchange rate up to 1.2670. Despite this surge, the manufacturing sector's underwhelming performance cannot be overlooked

As we progress through this week, market participants are closely monitoring not only the Fed and the BoE's rate decisions but also the anticipated policy trajectory through 2025. With clear lines drawn in terms of technical support and resistance, the volatility is poised to escalate.

Following the release of the preliminary S&P Global/CIPS PMI on December 16, the pound/dollar rate saw a significant increase, hitting the 1.2670 mark during European trading hours on that MondayThe data indicated that the overall business activity in the UK expanded steadily at a level of 50.5, largely overshadowing the unexpectedly sharp decline in manufacturing activity thanks to the impressive performance of services output.

Drilling down into the specifics, the manufacturing PMI in November dropped from 48.0 to 47.3, contrary to economists' expectations for a slight improvement to 48.1. Meanwhile, the services sector activity PMI rose from its previous figure of 50.8 and a forecasted 51.0 to 51.4, reflecting steady overall growth

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However, respondents in the survey expressed concerns about the business outlook due to factors such as weak consumer confidence, tighter corporate budgets, and a reduction in discretionary spendingThe report also highlighted a decline in total employment for the third consecutive month, with some firms pointing to an impending increase in employer national insurance contributions, prompting them to reduce working hours and reconsider their staffing structures.

A recent survey by the Recruitment and Employment Confederation indicated that the rise in national insurance contributions from 13.8% to 15% has sparked discontent among employers.

In the meantime, the market is also anticipating the publication of the U.SManufacturing PMI preliminary data, scheduled for December 16 at 22:45. Analysts expect the report to reveal a cooling in overall business activity due to slowdowns in both manufacturing and services sectors

The impacts of U.Sdemand and inflation expectations are also on the radar.

Despite a rebound in the dollar and the DXY hovering around 107.00, the GBP/USD pair continues to demonstrate robust performanceThe upcoming interest rate decision from both the Fed and the BoE on December 19 likely indicates elevated volatility for the pound against the dollar.

Market participants are particularly focused on the divergence in monetary policy: The Fed is expected to cut rates by 25 basis points, lowering the rates to a range of 4.25%-4.50%, while the BoE is likely to maintain its current rate at 4.75%. However, as the markets have largely priced in the anticipated rate decisions of both central banks, attention has shifted toward the outlook for 2025. Currently, there are expectations for both the Fed and the BoE to potentially cut rates three times in 2025.

Additionally, this week will see the release of UK employment data up to October and November's consumer price index

Significant deviations from expected outcomes in employment or inflation data could reshape market expectations surrounding the BoE's interest rate decision on Thursday and further influence predictions about policy paths in 2025.

From a technical standpoint, analysts have drawn the following interpretations:

As of December 16, the GBP/USD has rebounded to 1.2653, halting a three-day losing streakHowever, with all short- to long-term moving averages trending downward, the technical outlook for GBP/USD remains bearish.

On the other hand, the ascending trend line established from the October 2023 low (approximately 1.2035) continues to provide support for the exchange rate around the 1.2600 level.

The 14-day Relative Strength Index (RSI) is hovering around the 40.00 mark

Should it drop below 40.00, this could trigger bearish momentum.

Looking downward, GBP/USD is expected to find support near the psychological level of 1.2500. Conversely, the peak of 1.2810 recorded on December 6 will serve as a critical resistance level.

As the pound capitalizes on its gains fueled by the PMI, the battle between bulls and bears leading up to the interest rate announcements has intensified to a boiling pointMarket participants are akin to players in a tense chess match; every economic data release and each policy expectation serves as a line on the board, with their shifts possessing the potential to alter the game’s trajectoryWhether bulls or bears emerge victorious will be contingent upon the conclusion of the interest rate decisions and the subsequent market developmentsOnly time will reveal the outcome of this intricate struggle.