The Pound sterling (GBP) fell against the US dollar (USD) in the European trading session on Friday, reaching 1.2958. This decline came after the US dollar recovered some ground after the sharp correction witnessed by the greenback on Thursday. Meanwhile, the US dollar index (DXY), which measures the performance of the dollar against six major currencies, is trading in a narrow range near 104.50. The US dollar had rebounded on Thursday, recovering about 60% of its losses incurred on Wednesday’s session, after traders liquidated some of the so-called “Trump trades”.
Expectations regarding the US Federal Reserve’s policy also declined after comments by its Chairman Jerome Powell were understood to indicate a more accommodative monetary policy. The US dollar saw a notable increase in October and the first week of November, as traders pointed to the potential effects of Donald Trump’s victory in the upcoming US presidential election.
In terms of interest rate policy, the Federal Reserve cut interest rates by 25 basis points to 4.50% – 4.75%, as expected. During the press conference following the decision, Jerome Powell confirmed his confidence in the continuation of the monetary easing cycle and explained that the trend towards achieving the 2% inflation target remains intact, and that there are some signs of a slowdown in the labor market.
Regarding Trump’s victory, Powell stated that he does not expect it to have any immediate impact on the path of interest rates, and did not comment on the future possibilities for this. On the other hand, Trump’s victory is seen as potentially leading to an increase in inflation, given his positions in support of increasing import tariffs and reducing corporate taxes.
New expectations for the pound and interest rates after the BoE meeting
Following the latest meeting, traders have reduced their bets on a rate cut, with the odds of another quarter-point cut in December now at 16%, compared to 25% earlier in the week. In this context, Kristin Kundby Nielsen, currency strategist at Danske Bank, stressed that the political risk premium on the pound has faded, thanks to the BoE’s gradual approach to cutting rates, which has helped calm markets.
The impact of the budget on the Pound sterling
Credit Agricole and Jefferies expect the pound to see a slowdown in interest rate cuts, which could boost the British currency against the Japanese yen and non-dollar currencies. Indeed, options market signals are pointing to an improvement in investor sentiment towards the pound, which has begun to recover after hitting its lowest levels since March 2023.
The future of the pound in light of US politics and global economic factors
Although Brad Bechtel, head of currencies at Jefferies, does not recommend positioning on the strength of the pound against the dollar, the general situation suggests that the US dollar may struggle to advance significantly. This is due to expectations that the Federal Reserve will face challenges from the inflationary policies adopted by the Trump White House.
On the other hand, economic factors support the pound, as increased demand for British government bonds is expected. Political turmoil in Germany and early elections could also lead to government changes that open the way for increased bond issuance.
Daily Market Brief: UK employment impact on Pound sterling
The Pound sterling is trading cautiously on Friday against most major currencies, despite comments from Bank of England Governor Andrew Bailey on Thursday that were less dovish than expected. While the bank cut interest rates by 25 basis points to 4.75%, Bailey indicated that rates would continue to fall gradually if the economy continues to expand as expected. However, he stressed that monetary policy would remain tight until inflationary risks abate.
In his comments on the autumn fiscal statement, Bailey added that he did not see a need to significantly adjust the path of interest rates, noting that the government’s fiscal measures could support economic growth by 0.75% next year, offsetting the impact of higher taxes. Bailey avoided addressing the impact of the Trump administration on the UK economy but stressed that the Bank of England would remain closely monitoring US trade decisions.
Investors are now looking ahead to a speech by Hugh Bell, the Bank of England’s chief economist, for fresh signals on interest rates, as well as UK employment data for the three months to September, due out on Tuesday.
Major banks such as JPMorgan and Credit Agricole are expecting further gains for the pound as political sentiment in the US and Germany shifts, which could push the British currency towards its best weekly performance against the euro in 2024. The pound is also on track for its first win against the dollar in six years.
Technical Analysis: GBP/USD below 1.3000
Technically, the pound is trading at 1.2958 against the US dollar, in an area close to support after a breakout in an ascending channel. Despite recovering from an 11-week low near 1.2830, the overall trend remains bearish, with the 20- and 50-day EMAs, which are around 1.3000 and 1.3035, indicating continued selling pressure.
