GBP/USD posts modest gains above 1.3000, traders await US private payroll data
- GBP/USD trades with mild gains around 1.3025 in Wednesday’s early European session.
- UK’s Reeves addressed speculation over tax rises ahead of the Autumn Budget later in the month.
- Traders brace for the US October private payroll and ISM Services PMI on Wednesday.
The GBP/USD pair posts modest gains near 1.3025 during the early European session on Wednesday, bolstered by a softer US Dollar (USD). However, the potential upside for the major pair might be limited, as UK Finance Minister Rachel Reeves hinted at broad tax rises in her budget later this month. The US October private payroll and ISM Services Purchasing Managers Index (PMI) reports will be published later on Wednesday.
Rachel Reeves, on Tuesday, gave a clearer indication that tax hikes are coming in her Autumn Budget later in November. The Sunday Times reported that Reeves was looking at more than 100 possible tax and spending options, with a focus on the top third of earners. Reeves emphasized her commitment to her fiscal rules and did so again on Tuesday, saying it was “iron-clad.” The Cable is likely to stay on the back foot ahead of the UK Autumn Budget on November 26 as expectations mount for tax hikes.
The Bank of England (BoE) is expected to hold its key interest rate at 4.0% in its upcoming meeting on Thursday, although the decision is considered to be finely balanced. Some believe the UK central bank may wait to see the effect of these fiscal measures before making a rate decision.
Markets have also had to deal with a record-length government shutdown, which has all but halted the flow of macroeconomic data. Traders will closely watch the US private ADP payrolls, which are due later on Wednesday. ADP Nonfarm Employment Change is projected to show 25K jobs added, compared to a 32K loss in the previous reading. In case of a stronger-than-expected outcome, this could underpin the Greenback and create a headwind for the major pair.
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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