The British pound traded 0.15% higher to approach 1.3180 against the US dollar during the European trading session on Wednesday. GBP/USD rose ahead of the UK budget report announcement at 12:30 GMT.
Investors will be paying close attention to the Budget announcement to see how much Labor will raise in taxes on households to maintain its self-imposed fiscal rules.
According to Reuters, economists expect British Chancellor of the Exchequer Rachel Reeves to announce tax rises of between £20-30 billion that would help the government address the £22 billion deficit in government finances.
Increased household tax increases would mitigate financial risks in the UK, a scenario that could impact gilt yields. At the time of writing, 10-year UK government bond yields were down 0.3% to approximately 4.51%.
On the monetary policy front, traders are becoming increasingly confident that the Bank of England (BoE) will cut interest rates at its December monetary policy meeting. The Bank of England’s dovish outlook intensified, with recent inflation data showing signs of easing price pressures and labor demand remaining weak.
Meanwhile, the US dollar came under pressure as traders raised their bets to support further interest rate cuts by the Federal Reserve this year.
According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points to 3.50%-3.75% at the December meeting rose to 84.9% from 30.1% seen a week ago.
Dovish speculation from the Fed intensified after New York Fed President John Williams warned of slowing economic growth and a gradual slowdown in the labor market, while supporting the need for further monetary policy adjustments. “I see monetary policy as modestly tight, although somewhat less than it was before our recent actions,” Williams said on Friday, adding that there is room for further adjustment in the near term.
GBP/USD daily chart
The British pound rose to nearly 1.3180 against the US dollar on Wednesday. However, the overall trend of the GBP/USD pair remains bearish, as it is trading below the 200-day Exponential Moving Average (EMA), which is located near 1.3250. The August low around 1.3140 acts as a major barrier for the British pound, which has been its main support area.
The 14-day RSI rose to around the 50.00 level. New bullish momentum may emerge for the British pound if it breaks above the 60.00 level.
Looking down, the April low near 1.2700 will act as a key support area. On the upside, the October 28 high around 1.3370 will act as a major barrier.
Frequently asked questions about the pound sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most popular foreign exchange (FX) trading unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to data for 2022. The main trading pairs are GBP/USD, also known as “Cable”, which accounts for 11% of FX, GBP/JPY, or “Dragon” as traders know it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary objective of “price stability” – a stable inflation rate of around 2%. The primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it more expensive for individuals and businesses to obtain credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to reduce the cost of credit so that companies borrow more to invest in growth-generating projects.
Data releases measure the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing PMIs, services and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the British pound is likely to fall.
Another important data release for the British Pound is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly sought-after exports, its currency will take full advantage of the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
