Pound Sterling struggles against US Dollar as traders pare Fed dovish bets
- The Pound Sterling trades with caution around 1.3100 against the US Dollar.
- Traders turn doubtful over whether the Fed will cut interest rates again this year.
- UK Chancellor Reeves might raise taxes to cover the fiscal shortfall.
The Pound Sterling (GBP) trades cautiously near its over six-month low of 1.3100 against the US Dollar (USD) during the European trading session on Tuesday. The GBP/USD pair struggles to hold its immediate lows as the US Dollar trades firmly amid receding speculation that the Federal Reserve (Fed) could cut interest rates again this year.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks down to near 99.85. During the day, the DXY has posted a fresh three-month high around 100.00.
The CME FedWatch tool shows that the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% at the December meeting has eased to 67.3% from 94.4% seen a week ago.
Traders adjusted Fed dovish bets after Chairman Jerome Powell commented in the press conference last week that the December rate cut is “far from a foregone conclusion” as officials had “strongly different views” in the monetary policy meeting, adding that they “haven't made a decision about December”.
Meanwhile, San Francisco Fed President Mary Daly stated in a moderated discussion at the Forum Club of the Palm Beaches in Florida on Monday that the December monetary policy decision will be guided by the incoming data. Daly added that the monetary policy needs to be modestly restrictive as inflation is well above the Fed’s 2% target.
Daily digest market movers: Pound Sterling weakens against its currency peers
- The Pound Sterling trades lower against its major currency peers, except antipodeans, on Tuesday. The GBP faces selling pressure as investors turn cautious ahead of the Bank of England’s (BoE) monetary policy announcement on Thursday.
- Financial market participants are divided over whether the BoE will cut interest rates in the next meeting. In the September policy, the BoE kept interest rates steady at 4% as inflationary pressures remained higher. However, the BoE expressed confidence that price pressures would peak around 4% in September.
- The recent Consumer Price Index (CPI) report showed that inflationary pressures broadly grew at a moderate pace.
- On the fiscal front, investors expect the United Kingdom (UK) Chancellor of the Exchequer, Rachel Reeves, to raise taxes in the upcoming Autumn Budget later this month to plug a £22bn shortfall in the government's finances. The Sunday Times has reported that Reeves was looking at more than 100 possible tax and spending options, with a focus on the top third of earners.
- Going forward, the GBP/USD pair will be influenced by the US ADP Employment Change data for October, which will be released on Wednesday. Investors will pay close attention to the US ADP payrolls data, as the Nonfarm Payrolls (NFP) data remains unavailable due to the US federal shutdown.
- Economists expect the US ADP report to show that private employers added 24K fresh workers against laying off 32K employees in September. Signs of improving US job market conditions would further weigh on market expectations for more interest rate cuts by the Fed this year.
Technical Analysis: Pound Sterling trades cautiously around 1.3100
The Pound Sterling trades in a tight range above 1.3100 against the US Dollar during Tuesday’s European session. The outlook of the cable remains bearish as it trades below the 200-day Exponential Moving Average (EMA), which is around 1.3279.
The 14-day Relative Strength Index (RSI) slumps below 30.00, indicating that the overall momentum is bearish.
Looking down, the psychological level of 1.3000 will act as a key support zone. On the upside, the October 28 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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