The GBP/USD pair continues its winning streak for the fifth day in a row, trading around the 1.3190 level during Asian hours on Wednesday. Traders are waiting for UK Chancellor of the Exchequer, Rachel Reeves, to deliver the Autumn Budget later today.
British Finance Minister Rachel Reeves is expected to unveil new tax rises worth tens of billions of pounds, a budget that will test her credibility with both bond investors and lawmakers pushing for higher social care spending. A more responsible fiscal stance could enhance long-term confidence in UK assets, providing moderate support for sterling.
Just over a year after implementing £40 billion ($52.7 billion) in tax hikes, the largest since the 1990s, that were described as a one-off. Reeves is now forced to take additional measures to raise revenues amid the possibility of lower economic forecasts for Britain and higher debt servicing costs.
UK inflation fell to 3.6% in October and boosted expectations of interest rate cuts from the Bank of England. Markets are now pricing in an 80% chance of a 25 basis point cut in December, pushing government bond yields lower ahead of the Budget.
GBP/USD also rose as the US dollar (USD) struggled, with weak economic data in the US boosting expectations of a Federal Reserve (Fed) rate cut in December. The CME FedWatch tool indicates that markets now estimate more than an 84% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points at its December meeting, up from the 50% chance that markets had priced in a week ago.
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.
