The Pound Sterling (GBP) faced significant selling pressure on Tuesday, lagging behind major currency counterparts, with the exception of some antipodean currencies. Investor sentiment has turned cautious amid expectations that UK Chancellor of the Exchequer, Rachel Reeves, will announce tax increases in an upcoming Autumn Budget aimed at addressing a substantial £22 billion gap in public finances. Reports from The Sunday Times indicated that Reeves is exploring over 100 different tax and spending measures, particularly targeting the top third of income earners.
Attention this week is also centered on the Bank of England’s (BoE) forthcoming monetary policy announcement, set to take place on Thursday. Market participants are split on whether the BoE will opt for interest rate cuts in the upcoming meeting. The previous policy meeting in September saw rates held steady at 4%, with the bank expressing a belief that inflation pressures would peak around this level. Nonetheless, Reeves has cautioned that inflation appears to be decreasing too slowly, resulting in a growing burden from rising borrowing costs. She emphasized that her budgetary decisions will be aimed at combating inflation.
As the day progressed, the GBP continued its downward trajectory against the US Dollar, falling to approximately 1.3070 during European trading hours. This decline occurred as the US Dollar strengthened due to diminishing speculations regarding potential interest rate cuts by the Federal Reserve this year. The US Dollar Index (DXY) showed a slight decline to near 99.85, having previously reached a three-month high around 100.00. Current market probabilities reflect a reduced chance—67.3% down from 94.4% a week earlier—of the Fed cutting interest rates by 25 basis points at the December meeting. This adjustment in expectations followed comments from Fed Chairman Jerome Powell, who indicated that December’s decision is not assured, echoing sentiments of differing perspectives within the Federal Open Market Committee.
Additional comments from San Francisco Fed President Mary Daly highlighted that future policy decisions would hinge on incoming economic data, noting a need for a “modestly restrictive” monetary stance as inflation still significantly exceeds the Fed’s 2% target.
Looking ahead, the GBP/USD pair will be heavily influenced by the upcoming ADP Employment Change data for October, scheduled for release on Wednesday. This report is particularly significant since the Nonfarm Payrolls (NFP) data will be unavailable due to a federal shutdown. Forecasts suggest that US private employers may have added 24,000 jobs, contrasting with a loss of 32,000 in September. Any indications of improving labor market conditions could further diminish expectations for Fed rate cuts later this year.
From a technical analysis perspective, the Pound Sterling has slipped below the critical 1.3100 level against the US Dollar. The overall bearish outlook for the GBP is reinforced by its trading position beneath the 200-day Exponential Moving Average (EMA), situated around 1.3279. The 14-day Relative Strength Index (RSI) has dipped below 30.00, further indicating weak momentum. Traders are watching the psychological support level at 1.3000 closely, while the resistance level is anticipated around the recent high of 1.3370 from late October.
