- The Pound Sterling wobbles ahead of the UK budget announcement, in which the Labour administration is expected to raise taxes and boost spending.
- Investors expect the BoE to cut interest rates by 25 bps on November 7.
- Market participants await US private employment and Q3 GDP data.
The Pound Sterling (GBP) trades cautiously against its major peers on Wednesday ahead of the announcement of the United Kingdom’s (UK) Autumn Forecast Statement at 12:45 GMT. This will be Labour’s first budget presentation in over 15 years, in which Chancellor of the Exchequer Rachel Reeves is expected to announce a tax hike on various income-generating sources and provide higher spending plans to boost investment.
According to the UBS, the Budget will focus on three key aspects: First, changes in fiscal rules to increase headroom for future borrowing; second, a package of tax increases, probably on capital gains, inheritance, pensions, and – most importantly in terms of additional revenues – national insurance contributions for employers; third, additional spending on investment projects, Reuters reported.
Market participants will mainly focus on the quantum of tax raises and spending budgets to forecast their impact on inflationary pressures. Analysts at UBS expect that higher spending will likely lead to an upward revision in the fiscal deficit to 3.1% of Gross Domestic Product (GDP).
A higher deficit target would deepen fears of price pressures remaining persistent and force traders to pare Bank of England (BoE) dovish bets for the remainder of the year. According to the October 22-28 Reuters poll, the BoE is widely anticipated to cut interest rates by 25 basis points (bps) in its upcoming policy meeting on November 7. This would be the BoE’s second interest-rate cut this year, pushing key borrowing rates down to 4.75%.
Daily digest market movers: Pound Sterling edges higher against US Dollar
- The Pound Sterling edges higher to near 1.3020 against the US Dollar (USD) in Wednesday’s London session. The GBP/USD pair gains slightly as the US Dollar drops ahead of the United States (US) ADP Employment Change for October and the Q3 flash GDP data, which will be published around 12:30 GMT.
- The ADP Employment report is expected to show that the private sector hired 115K new workers in October, lower than 143K in September. A slower growth in the labor demand would renew fears of a deteriorating job market, which would prompt expectations of Federal Reserve (Fed) interest rate cuts. According to the CME FedWatch tool, the central bank is expected to cut interest rates further by 25 bps in both policy meetings in November and December.
- Tuesday’s JOLTS Job Openings data for September also refreshed fears of slower labor demand as new vacancies came in lower than expected. For more updates on the current labor market status, investors will pay close attention to the US Nonfarm Payrolls (NFP) data for October, which will be published on Friday.
- Meanwhile, the US economy is expected to have grown at a steady pace of 3.0% in the third quarter of the year.
Technical Analysis: Pound Sterling strives to hold above 1.3000
The Pound Sterling edges higher above 1.3000 against the US Dollar (USD) in European trading hours on Wednesday. The GBP/USD pair holds the lower boundary of a Rising Channel chart formation around 1.2900 on the daily time frame.
The near-term trend of the Cable remains uncertain as it stays below the 50-day Exponential Moving Average (EMA), which trades around 1.3070.
The 14-day Relative Strength Index (RSI) stays above 40.00. A fresh bearish momentum would trigger if it fails to climb above it.
Looking down, the 200-day EMA near 1.2845 will be a major support zone for Pound Sterling bulls. On the upside, the Cable will face resistance near the 20-day EMA around 1.3060.
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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