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Pound retreats from its high ahead of UK Budget and Fed decision
- 1.3350 gives way as GBP/USD retreats from its five-week high on 22 October.
- Ahead of the Fed decision, Dollar short-covering drives trading while the Pound holds steady against the Euro.
- Wednesday brings Chancellor Healey's Budget, followed by US PCE on Thursday.
GBP/USD finished just below 1.3350. Monday's decline took the pair to its lowest since the 20 October jobs figures, ending three sessions above that level. With the Pound unchanged against the Euro, the fall reflected traders covering Dollar shorts ahead of Wednesday's Federal Open Market Committee (FOMC) decision.
Following September's rate increase, the Fed is expected to leave rates unchanged. Traders reduced some bets against the Dollar ahead of the decision. An almost identical decline in EUR/USD and GBP/USD kept EUR/GBP steady, attributing the entire GBP/USD move to the Dollar.
A minimum-wage increase of about 3.9%, to around £13.20 for over-21s, is planned by Chancellor Healey, The Times reported. That would exceed the 3.7% growth in pay excluding bonuses by two-tenths. The pay figure is central to the argument for a Bank of England (BoE) rate increase on 5 November. In the following two five-minute bars, GBP/USD advanced.
Wednesday Budget and Fed Decision
Eight days before the BoE's 5 November decision, Chancellor Healey will deliver his first Budget on Wednesday. The Debt Management Office will release its gilt sales plan at the same time. Traders have almost fully priced in a quarter-point increase in the UK's Bank Rate from 3.75% at the BoE meeting.
Futures imply a near 90% probability that the Fed will keep rates at 3.75%-4.00% when it announces its decision on Wednesday at 18:00 GMT. The probability of a December increase is near 80%. Thursday at 12:30 GMT brings the initial estimate of US third-quarter Gross Domestic Product (GDP) and September's Personal Consumption Expenditures Price Index (PCE). Both releases will inform pricing for December.
1.3400 High Meets 200-Day EMA
A test of the 200-day Exponential Moving Average (EMA) produced the 22 October high just above 1.3400, with the average sitting at roughly the same level. GBP/USD slipped beneath its 50-day EMA on Monday. The retreat from that peak amounts to about a third of the advance from the 14 October low near 1.3150, while daily momentum is easing from overbought conditions.
GBP/USD daily price chart
Pound Sterling: Key Questions
Dating back to 886 AD, the Pound Sterling (GBP) is the world's oldest currency and serves as the United Kingdom's official currency. According to 2022 figures, it ranks fourth in global foreign exchange (FX) trading, representing 12% of transactions with average daily turnover of $630 billion. Among its main pairs, GBP/USD, known as ‘Cable’, accounts for 11% of FX trading. GBP/JPY, called the ‘Dragon’ by traders, represents 3%, while EUR/GBP accounts for 2%. Issuance of the Pound Sterling is the responsibility of the Bank of England (BoE).
Monetary policy set by the Bank of England has the greatest influence on the Pound Sterling's value. Policy decisions depend on progress towards the BoE's central objective of “price stability” – inflation holding at around 2%. Adjusting interest rates is its main means of meeting that objective. To curb excessively high inflation, the BoE raises interest rates, increasing borrowing costs for households and businesses. GBP generally benefits because higher rates make the UK more appealing to international investors seeking a place for their funds. By contrast, excessively low inflation signals weaker economic growth. The BoE would then consider cutting rates to reduce borrowing costs, encouraging businesses to finance investment in projects that support growth.
By indicating the economy's health, published data can move the Pound Sterling. GDP, Manufacturing and Services PMIs, and employment figures are among the indicators that can shape GBP's direction. Sterling benefits from economic strength, which draws in additional overseas investment and may prompt the BoE to raise interest rates. Such an increase would directly strengthen GBP. Weak economic figures, conversely, are likely to weigh on the Pound Sterling.
The Trade Balance is another important release for the Pound Sterling. Over a specified period, it records the difference between a country's export earnings and its spending on imports. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods. A positive net Trade Balance therefore supports the currency, while a negative balance has the opposite effect.
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