The Pound slips to its lowest since June as a BoE hold voter pushes back
- GBP/USD slips to 1.3200, its lowest since June, as a BoE hold voter pushes back.
- VAT comes off UK electricity bills on Thursday, worth about 0.1 point of CPI.
- BoE decides on November 5 with the UK's Bank Rate at 3.75%.
The case for another Bank of England (BoE) hike rests on energy prices, and on Thursday the government takes value-added tax (VAT) off household electricity bills. GBP/USD fell to 1.3200 on Tuesday, its lowest since late June, after BoE external member Taylor said energy prices alone don't justify higher rates. The typical energy bill still goes up on Thursday, because Ofgem lifts its price cap the same day.
The pay survey a BoE hold voter wants arrives after two more decisions
External member Taylor, one of the six who voted to hold the UK's Bank Rate at 3.75% on September 17, said the case for further increases isn't compelling unless energy prices stay high for an extended period and spread into broader inflation. He called policy restrictive enough and named the BoE agents' survey of firms' pay plans, due in January, as a key piece of evidence. The BoE decides on November 5 and again on December 17.
BoE Chief Economist Pill and external members Greene and Mann voted for a hike in September. External member Mann said on Tuesday that inflation staying above 2% is a problem in its own right. For GBP/USD to recover, UK rates have to outpace US rates, so a hold voter who wants January's data keeps a November hike from being a done deal. The three voted to hike because energy and food prices kept rising, and external member Taylor said on Tuesday that energy prices alone aren't a reason to.
A BoE hike voter speaks on the day VAT comes off electricity
The 5% VAT on household electricity drops to zero on Thursday, and the Treasury expects that to take about 0.1 percentage point off Consumer Price Index (CPI) inflation. Ofgem's price cap rises 4% the same day, adding about £60 to a typical household's annual bill, as gas bills rise 8% and electricity stays broadly flat. The Treasury's 0.1 point comes off electricity, and the BoE's September minutes traced most of the energy-driven overshoot in inflation to motor fuel.
External member Mann speaks on Thursday at 12:00 GMT. Britain's final second-quarter Gross Domestic Product (GDP) estimate comes out a day earlier, at 06:00 GMT on Wednesday, forecast unchanged at 0.4% on the quarter and 1.2% YoY.
The US releases carry more weight for the pair. Wednesday's inflation data and Friday's jobs report set the odds of a Fed hike on October 28, eight days before the BoE's next decision, and they're likely to move GBP/USD more than anything said in London.
Technical levels
Resistance: Tuesday's decline began near 1.3250, and Monday's rebound stopped short of 1.3300.
Support: 1.3200 held on Thursday and again on Tuesday, when the low came in a few pips under Thursday's. Below it, the late-June low just under 1.3150 is the last floor on the chart.
Bias: Short while 1.3300 caps, looking for a daily close under 1.3200 and then the late-June low near 1.3150. The daily Stochastic Relative Strength Index (Stoch RSI) reads about 9 and has stayed below 20 since mid-September, so a bounce toward 1.3250 would fit inside the trade. A daily close above 1.3300 ends the short.
GBP/USD daily chart
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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