Pound sterling (GBP) rose significantly on Monday, reaching around 1.2976 against the US dollar (USD), supported by the decline in the value of the dollar. This rise comes at a time when investors are monitoring a set of US economic data expected this week.
In the same context, the US dollar index, which measures the performance of the dollar against six major currencies, rose to its highest level in nearly three months, reaching around 104.60. Investors are expected to pay close attention to the preliminary US GDP data for the third quarter and the non-farm payrolls (NFP) data for October, as these data will provide a comprehensive view of economic growth and labor demand, which will directly affect market expectations regarding the interest rates that the Federal Reserve will set for the remainder of the year.
The Federal Reserve has also begun to ease its monetary policy, as it cut interest rates by 50 basis points in September, amid concerns about increasing economic risks, although inflationary pressures remain on track towards the bank’s 2% target. According to the CME FedWatch tool, traders are expecting the central bank to make another 25-basis point rate cut in November and December.
Meanwhile, uncertainty around the US presidential election continues to weigh on the dollar. During meetings hosted by the International Monetary Fund last week, financial experts discussed the possible outcome of the election, with many expressing concerns about former President Donald Trump’s pledge to raise tariffs on all countries, which could increase costs associated with global supply chains if he wins against current Vice President Kamala Harris.
Elsewhere, the pound is trading in a tight range against most of its peers this morning, awaiting the release of the latest UK retail sales survey from the CBI.
Sterling under pressure: Investors cautious ahead of the budget
Analysts expect upcoming economic data to rise by 5 to 10 points, which would increase the chances of boosting the Pound sterling exchange rate upon release. However, investors remain cautious about making bold decisions regarding the British currency, especially with the UK Autumn Budget approaching, scheduled for next Wednesday.
This caution comes as a result of the great anticipation of the budget and the impactful economic changes it may bring. In this context, Gabriel McEwen, Head of Macroeconomics at Sad Rabbit Investments, commented: “As Chancellor Reeves prepares to deliver her inaugural budget, the specter of a disastrous mini-budget for 2022 remains in the minds of investors.
With increasing talk of ‘difficult decisions and ‘painful’ measures, investors tend to be cautious in their decisions to avoid any mistakes that may repeat the market crash that occurred last year.”
On the other hand, the euro is facing challenges in determining its path against other major currencies. This comes as a result of the absence of influential economic data from the eurozone, which has added more volatility to trading in the single currency. It is worth noting that the current trend of cutting interest rates by the European Central Bank has negatively affected the euro exchange rate, especially in the wake of the disappointing economic data released recently, including the weak reading of the Purchasing Managers Index.
Regarding the future expectations for the pound and the euro, investors are awaiting the release of the German consumer confidence index from GfK, as estimates indicate the possibility of recording another negative reading, which may negatively affect the euro movement at the beginning of Tuesday’s trading. In the absence of important British data, the pound remains vulnerable to volatility until the announcement of the autumn budget.
Interest rate cut expectations weigh on Pound sterling appeal
The Pound sterling outperformed most of its major peers, except the euro, on Monday, ahead of the UK’s autumn outlook statement due on Wednesday. Labor’s first budget is unlikely to deliver more spending than the previous administration proposed, with high inflation remaining a key issue for the government. The Chancellor of the Exchequer is expected to stick to commitments made in his election manifesto.
According to Sky News, the government will stick to its pledges not to raise income tax or national insurance, but could see a 2-percentage point increase in employers’ national insurance. Labor is also expected to offer significant support for housing affordability.
Elsewhere, growing speculation that the Bank of England could cut interest rates in the remaining meetings of the year could dampen sterling’s appeal. Bank of England Governor Andrew Bailey’s dovish comments at last week’s IMF meeting have boosted market expectations that the bank will cut rates by 25 basis points. Bailey stated, “Inflation is accelerating more quickly than anticipated, but real questions remain about potential structural changes in the economy.”
The British pound is holding above the 1.2900 psychological support level against the US dollar during US trading hours on Monday. The GBP/USD pair is at a turning point near the lower bound of the ascending channel formation around 1.2900 on the daily time frame. Bearish crosses, represented by the 20- and 50-day EMAs near 1.3080, suggest further weakness ahead. The 14-day Relative Strength Index (RSI) remains within the 20.00-40.00 range, indicating active bearish momentum.
