Pound Sterling trades higher against US Dollar ahead of UK budget announcement
- The Pound Sterling moves higher to near 1.3180 against the US Dollar ahead of the UK budget report.
- UK Chancellor Reeves is expected to raise taxes between 20-30 billion pounds.
- Fed’s Williams support interest rate cuts amid slowing US job growth.
The Pound Sterling trades 0.15% higher to near 1.3180 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair gains ahead of the announcement of United Kingdom (UK) Budget Report at 12:30 GMT.
Investors will pay close attention to the budget announcement to know how much the Labour Party will raise taxes on households to maintain their self-imposed fiscal rules.
According to Reuters, economists expect UK Chancellor of the Exchequer Rachel Reeves to announce tax hikes between 20-30 billion pounds that will help government to address the £22bn shortfall in the government's finances.
The increment of tax hikes on households would ease UK fiscal risks, a scenario that might weigh on yields on gilt securities. At the time of writing, 10-year UK gilt yields trade 0.3% lower to near 4.51%.
On the monetary policy front, traders have become increasingly confident that the Bank of England (BoE) will cut interest rates in its monetary policy meeting in December. BoE dovish expectations have intensified as recent inflation data showed signs of price pressures cooling down, and the labour demand remaining weak.
Meanwhile, the US Dollar has come under pressure as traders have raised bets supporting more interest rate cuts by the Federal Reserve (Fed) this year.
According to the CME FedWatch tool, the probability of the Fed to cut interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has increased to 84.9% from 30.1% seen a week ago.
Fed dovish speculation intensified after New York Fed Bank President John Williams warned of slowing economic growth and gradually cooling job market, while supporting the need of further monetary policy adjustments. “I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions, adding that there is room for a further adjustment in the near term,” Williams said on Friday.
GBP/USD daily chart
The Pound Sterling rises to near 1.3180 against the US Dollar on Wednesday. However, the overall trend of the GBP/USD pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3250. The August low around 1.3140 is acting as key barrier for the Cable, which used to be its key support zone.
The 14-day Relative Strength Index (RSI) rises to near 50.00. A fresh bullish momentum in the Cable would appear if it will break above 60.00.
Looking down, the April low near 1.2700 will act as a key support zone. On the upside, the October 28 high around 1.3370 will act as a key barrier.
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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