GBP/USD inches lower to near 1.3100 as UK Gilts tick down
- GBP/USD loses as UK 10-year Gilt yields weaken ahead of the looming November 26 budget.
- The Pound Sterling struggles as October’s softer inflation strengthened BoE rate cut bets.
- The US Dollar gains despite rising expectations of a Fed rate cut in December.
GBP/USD loses ground after three days of gains, trading around 1.3100 during the Asian hours on Tuesday. The Pound Sterling (GBP) came under pressure as UK 10-year Gilt yields edged lower to 4.54%, with investors awaiting the November 26 budget. Finance Minister Rachel Reeves is expected to find tens of billions of pounds to meet fiscal rules, while the OBR is set to downgrade growth and productivity forecasts.
GBP sentiment is further weighed by softer inflation, which eased to 3.6% in October and strengthened expectations of a Bank of England (BoE) rate cut. Markets now assign an 80% probability of a 25-bp cut in December, pushing gilt yields lower ahead of the budget.
The GBP/USD pair also remains subdued as the US Dollar (USD) recovers daily losses despite growing expectations of a Federal Reserve (Fed) rate cut in December intensifying, driven by recent dovish remarks from Fed policymakers.
The CME FedWatch Tool suggests that markets are now pricing in an 81% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, up from 71% probability that markets priced a day ago.
Fed Governor Christopher Waller told Fox Business on Monday that his primary concern is the weakening labour market, stating that inflation is “not a big problem” in light of recent softness in employment. Waller also suggested that the September payrolls figure is likely to be revised lower and cautioned that concentrated hiring is “not a good sign,” signalling his support for a near-term rate cut.
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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