GBP/USD gains above 1.3250 as Fed rate cut bets weigh on US Dollar
- GBP/USD rises as the US Dollar struggles due to rising expectations of a Federal Reserve rate cut
- CME FedWatch Tool indicates pricing in a more than 84% chance of the 25-basis-point Fed rate cut in December.
- The Pound Sterling finds support after the UK Autumn Budget announced £26 billion in tax increases.
GBP/USD continues its winning streak for the sixth successive session, trading around 1.3260 during the Asian hours on Thursday. The pair appreciates as the US Dollar (USD) struggles amid rising odds of Federal Reserve (Fed) rate cut bets in December.
US data showed unexpectedly low Initial Jobless Claims and stronger-than-expected Durable Goods Orders, yet rate-cut expectations remained intact. The CME FedWatch Tool suggests that markets are now pricing in a more than 84% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, up from the 30% probability that markets priced a week ago.
The US Department of Labor (DOL) reported Wednesday that Initial Jobless Claims dropped to 216,000 for the week ending November 22, a decline of 6,000 from the prior week’s revised level and below the market forecast of 225,000. Meanwhile, the 4-week moving average slipped by 1,000 to 223,750.
Fed rate expectations increased by reports that the White House has narrowed its search for the next Fed chair to National Economic Council Director Kevin Hassett. Investors see Hassett as supportive of US President Donald Trump’s preference for lower interest rates.
Additionally, the GBP/USD pair gains ground as the Pound Sterling (GBP) receives support after the latest United Kingdom (UK) budget revealed by Chancellor of the Exchequer, Rachel Reeves, raising taxes by £26 billion, following last year’s budget raised taxes by £40 billion.
UK Finance Minister Rachel Reeves said the government has £22 billion in fiscal headroom to absorb unexpected shocks. However, the Office for Budget Responsibility (OBR) noted that this room remains “limited” relative to its projections.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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