GBP/USD falls to near 1.3250 due to increased BoE rate cut bets, Fed policy awaited
- GBP/USD loses ground as Pound Sterling weakens on rising odds of BoE rate cuts.
- Traders now see about a 68% chance of a quarter-point BoE rate cut in December, amid easing inflation.
- The US Dollar struggles due to the increased likelihood of a 25-basis-point rate cut by the Fed.
GBP/USD loses ground for the second successive session, trading around 1.3250 during the Asian hours on Wednesday. The pair weakens as the Pound Sterling (GBP) declines following data from the British Retail Consortium (BRC) showing UK food prices falling at the fastest pace in nearly five years, strengthening expectations of upcoming Bank of England (BoE) rate cuts.
Traders now assign roughly a 68% probability to a quarter-point BoE rate cut in December, as softer inflation and fiscal headwinds provide the central bank with greater scope to ease policy. Expectations for rate cuts also strengthened after reports that the Office for Budget Responsibility plans to lower its UK productivity growth forecast by about 0.3 percentage points, a downgrade that could widen the fiscal gap by nearly £20 billion. The revision has intensified concerns ahead of Chancellor Rachel Reeves’s November budget, which is expected to address a potential shortfall of up to £35 billion.
However, the downside of the GBP/USD pair could be restrained as the US Dollar (USD) remains subdued ahead of the US Federal Reserve (Fed) policy decision due later in the day. The Fed is widely expected to lower interest rates by another quarter point, bringing the benchmark rate to 3.75-4.00%, at its October meeting. The CME FedWatch Tool indicates that markets are now pricing in a Fed rate cut in October and a 91% possibility of another reduction in December.
Traders will be watching for any signals from Fed Chair Jerome Powell regarding the pace of future easing, as markets have already priced in another rate cut in December. The October CNBC Fed Survey also indicates that the Fed could implement additional rate reductions over the next two meetings.
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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