Pound Sterling extends UK budget’s relief rally despite firm dovish BoE bets
- The Pound Sterling rises against its major currency peers despite firm BoE dovish expectations.
- UK’s OBR raised GDP growth forecast for 2025 to 1.5% from prior projections of 1%.
- Investors await the US ADP Employment Change and the ISM Services PMI data for November.
The Pound Sterling (GBP) trades higher against its major currency peers, except antipodeans, on Wednesday. The British currency appears to be extending its last week’s budget relief recovery, in which United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves announced a tax hike amounting to annual 26 billion pounds to fund fiscal hole, and made a buffer for unforeseen circumstances.
Sterling’s relief rally was also backed by upwardly revised Gross Domestic Product (GDP) growth projections for the current year. The Office for Budget Responsibility (OBR) raised economic growth projections for 2025 to 1.5%, higher than the prior forecast of 1%.
Meanwhile, the Bank of England (BoE) has warned of escalating financial risks in its half-yearly Financial Stability Report released on Tuesday. The BoE stated that threats to Britain's financial system had risen this year due to stretched valuations of companies investing in artificial intelligence, risky lending, and bets with borrowed money in government bond markets, Reuters reported.
On Tuesday, BoE Governor Andrew Bailey also highlighted the need to maintain focus on financial stability, which has become more important than ever.
The British currency gains even as traders remain increasingly confident that the central bank will cut interest rates in its next monetary policy announcement on December 18.
Major triggers behind the firm BoE's dovish expectations are weakening job market conditions and signs of softening inflation growth in the United Kingdom (UK) economy. The latest employment report showed that the ILO Unemployment Rate rose to 5% in the three months ending September, the highest level in four years. The Consumer Price Index (CPI) report for October showed that overall inflationary pressures grew moderately.
Daily digest market movers: Trump teases Hassett’s name as next Fed Chairman
- The Pound Sterling trades 0.25% higher to near 1.3250 against the US Dollar (USD) during the European trading session on Wednesday. The GBP/USD pair gains as the US Dollar faces selling pressure amid firming speculation that White House Economic Adviser Kevin Hassett could replace Jerome Powell as the next Federal Reserve (Fed) chairman.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is down almost 0.15% to near 99.10.
- On Tuesday, United States (US) President Donald Trump said, while responding to reporters at the White House event, that he has narrowed his choices for Fed Powell’s replacement to just one, which will be announced in early 2026, and teased the name of White House Economic Adviser Kevin Hassett.
- “I guess a potential Fed chair is here too. Am I allowed to say that? Potential. He’s a respected person, that I can tell you. Thank you, Kevin," Trump said, Reuters reported.
- The scenario of Hassett’s selection as the Fed’s next chair will be unfavorable for the US Dollar, given that he has supported lower interest rates several times in various interviews.
- In Wednesday’s session, investors will focus on the US ADP Employment Change and the ISM Services Purchasing Managers’ Index (PMI) data for November, which will be published during the North American session.
- Economists expect private employers to have added 5K fresh workers, significantly lower than 42K in October. The ISM Services PMI is expected to come in lower at 52.1 from 52.4 in October.
- The impact of the US ADP Employment Change data will be significant on market expectations for the Federal Reserve’s (Fed) monetary policy outlook, amid delayed Nonfarm Payrolls (NFP) data due to the government shutdown, which will finally be released on December 16.
- Several Federal Open Market Committee (FOMC) members have been expressing concerns over the job demand and have favoured further monetary policy expansion to support the same.
Technical Analysis: Pound Sterling extends upside to near 1.3250 against US Dollar
The Pound Sterling jumps to near 1.3250 against the US Dollar on Wednesday. The GBP/USD pair holds above the 20-day Exponential Moving Average (EMA) at 1.3192, demonstrating a positive trend in the near term.
The 14-day Relative Strength Index (RSI) at 54.80 stands above the 50 mid-line, confirming improving momentum.
A fresh Higher Low- Higher High formation on the daily chart signifies a trend reversal, which will keep Pound Sterling bulls on the front foot.
Looking down, the psychological level of 1.3000 will remain a key support zone for the pair. On the upside, the Cable could extend its upside towards the October 28 high of 1.3370.
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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