Pound Sterling struggles as UK productivity downgrade prompts tax raise risks
- The Pound Sterling strives to gain ground amid growing UK economic concerns.
- UK Chancellor Reeves might need to raise taxes or borrow funds to address public spending needs.
- The US Dollar strengthens on receding Fed dovish bets and improving US-China trade relations.
The Pound Sterling (GBP) stays under pressure against its major peers on Friday. The British currency has underperformed this week as investors worry that United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves might face backlash in the upcoming budget later in November due to escalating fiscal risks.
Lately, the UK Office for Budget Responsibility (OBR) has forecasted that the overall productivity of the economy could decline by 0.3%, a scenario that is expected to increase the fiscal budget gap by £21billion untill 2029-2030.
The situation adds to fears that UK Chancellor Reeves would be forced to go against her own rules, which could dampen households’ confidence.
According to the think tank of the Institute of Fiscal Studies (IFS), there is already a £22bn shortfall in the government's finances, which could be filled either by borrowing or raising taxes on working people.
The choice of one or a combination of both would lead Chancellor Reeves to renege on her own defined rules, as the Labour Party promised in its election manifesto that it wouldn't increase income tax, National Insurance (NI) or VAT for working people, and also stated that the government wouldn't borrow to fund day-to-day public spending.
Daily digest market movers: Pound Sterling falls further against US Dollar
- The Pound Sterling extends its losing streak against the US Dollar (USD) for the fourth trading day on Friday. The GBP/USD pair trades near its fresh over six-month low of 1.3116 posted on Thursday. The Cable has been under pressure due to a strengthening US Dollar amid easing Federal Reserve (Fed) dovish speculation for the December policy meeting and optimism on a trade deal between the United States (US) and China.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near an almost three-month high around 99.70 posted on Thursday.
- Traders have trimmed Fed dovish bets for the December meeting after Chairman Jerome Powell ruled out hopes of another interest rate cut this year. "Another cut in December is far from assured,” Powell said in the press conference after the monetary policy announcement on Wednesday, in which the Fed reduced interest rates by 25 basis points (bps) to the 3.75%-4.00% range. This was the second interest rate cut by the Fed in a row.
- According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 bps to 3.50%-3.75% in the December meeting has eased to 72.8% from 91.1% a week ago.
- Meanwhile, US Treasury Secretary Scott Bessent confirmed in an interview on Fox Business Network on Thursday that both Washington and Beijing would sign the trade deal soon. "The Kuala Lumpur agreement was finished in the middle of the night last night, so I expect we will exchange signatures possibly as soon as next week," Bessent said, Reuters reported.
- In Friday’s session, investors will focus on speeches from Fed members, Atlanta President Raphael Bostic and Cleveland President Beth Hammack, scheduled during North American trading hours.
Technical Analysis: Pound Sterling stays below 200-day EMA
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The Pound Sterling trades vulnerably against the US Dollar near an over six-month low of around 1.3115 posted on Thursday. The outlook of the pair remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3270.
The 14-day Relative Strength Index (RSI) extends decline below 40.00, indicating that a fresh bearish momentum has emerged.
Looking down, the psychological level of 1.3000 will act as a key support zone. On the upside, Tuesday's 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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