Pound Sterling refreshes almost three-month low against US Dollar ahead of Fed’s monetary policy
- The Pound Sterling declines to near 1.3230 against the US Dollar, the lowest level seen in almost three months.
- Investors expect the Fed to cut interest rates by 25 bps to the 3.75%-4.00% range.
- UK Chancellor Reeves might raise taxes on households and cut spending in the upcoming budget.
The Pound Sterling (GBP) posts a fresh almost three-month low at around 1.3230 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair slumps as the US Dollar Index (DXY) trades higher ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT and the continued underperformance from the British currency. At the time of writing, the US Dollar Index trades 0.2% higher to near 99.00.
Investors keenly await the Fed’s policy announcement to get cues on the interest rate outlook, while remaining confident that the United States (US) central bank will reduce borrowing rates for the second time in a row.
According to the CME FedWatch tool, traders have fully priced in a 25-basis-point (bps) reduction in interest rates that will push them lower to the 3.75%-4.00% range. The tool also shows that traders are confident the Fed will reduce interest rates again in the December policy meeting.
Cooling US inflation, a soft job market, and the ongoing federal shutdown are major factors behind firm Fed dovish bets. On Tuesday, Democratic leader Chuck Schumer in the US Senate stated that the ongoing government shutdown would extend to November.
"On November 1, people in more than 30 states are going to be aghast - aghast - when they see their bills, and they’re going to cry out. And I believe there will be increased pressure on Republicans to negotiate with us," Schumer told reporters, Reuters reported.
Daily digest market movers: Pound Sterling underperforms its major peers
- The Pound Sterling continues underperforming against its major currency peers on Wednesday as investors expect United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves to face difficult choices about where to increase taxes and cut spending in the upcoming Autumn Budget.
- A report from Citi showed on Tuesday that the Labour Party would raise taxes on consumers against increasing corporation tax or increasing employers’ contribution to social security schemes to fund its fiscal contraction of almost £30-35 billion. The report also showed that UK Chancellor Reeves could increase the dividend tax rate to 16%-17% from 8.75%, and implement new duties on sugar and gambling.
- The scenario of increasing taxes on households could dampen market sentiment, which would weigh on overall consumer spending.
- On the monetary policy front, investment bank firm Goldman Sachs now expects the Bank of England (BoE) to cut interest rates by 25 basis points (bps) to 3.75% at its monetary policy meeting next week. The investment banking firm turns dovish for November’s policy due to the softening labor market.
- Contrary to Goldman Sachs’ anticipation, a recent Reuters poll has shown that the BoE will not cut interest rates in the last quarter of the year. The poll also showed that the central bank will cut borrowing rates in the first quarter of 2026.
Technical Analysis: Pound Sterling slides further to near 1.3230
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The Pound Sterling extends its downside move against the US Dollar to near 1.3230 on Wednesday. The overall trend of the GBP/USD pair has turned bearish as it slides below the 200-day Exponential Moving Average (EMA), which trades at around 1.3295.
The 14-day Relative Strength Index (RSI) falls below 40.00. A fresh bearish momentum would emerge if the RSI holds below that level.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 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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