Pound Sterling trades flattish ahead of US presidential election, Fed-BoE decisions

• The Pound Sterling trades sideways against the US Dollar in the countdown to the US election.
• Investors expect the Fed and the BoE to cut interest rates by 25 bps on Thursday.
• Market participants still assess the impact of the UK budget announcements on the country’s inflation outlook.

The Pound Sterling (GBP) trades in a very tight range around 1.2950 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair consolidates ahead of the United States (US) presidential election, which will start in the North American session. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, also steadies near 103.80 after a sharp sell-off on Monday.

The Greenback went through a significant unwinding of long positions after the Des Moines Register/Mediacom Poll showed that current Vice President Kamala Harris leads former President Donald Trump by three points in Iowa, the state where Trump won clearly in 2016 and 2020. The US Dollar had a strong run-up in October as traders were pricing in Trump’s victory, given his preference for protectionist policies is expected to support the Greenback’s valuation.

Trump has vowed to levy a universal 10% tariff on all economies, except China – which is expected to face much higher duties – if he wins the presidential election. In addition to that, he also promised to lower corporate taxes, which would likely result in a high inflationary environment.

The US presidential election is the main event this week. However, investors will also focus on the Federal Reserve’s (Fed) monetary policy decision, which will be announced on Thursday. According to the CME FedWatch tool, the central bank is widely anticipated to cut interest rates by 25 basis points (bps) to 4.50%-4.75%. This will be the second interest rate cut by the Fed in a row. However, the size of the cut will be smaller after policymakers voted for a 50 bps rate cut in September.

Daily digest market movers: Pound Sterling remains muted ahead of BoE meeting

• The Pound Sterling trades broadly unchanged against its major peers, with investors focusing on the Bank of England’s (BoE) policy meeting on Thursday. The BoE is expected to cut interest rates by 25 basis points (bps) to 4.75%. This would be the second interest rate cut of the year. Seven Monetary Policy Committee (MPC) members are expected to vote for further policy easing, while the remaining two will likely support keeping rates steady.
• BoE external member Catherine Mann is expected to be one of two members who would vote to keep interest rates at their current levels. In a panel discussion at the sidelines of International Monetary Fund (IMF) meetings on October 24, Mann – an outspoken hawk – welcomed the release of the soft inflation data but emphasized the need for more slowdown. “In order to get to a target consistent with a 2% inflation rate, services (inflation) still have a long way to go,” Mann said.
• When asked about her current interest rate stance, Mann said that rate cuts are premature at this stage.
• Apart from the interest rate decision, investors will look for any comment from the BoE about the impact of the UK Autumn Forecast Statement – unveiled by UK Chancellor of the Exchequer Rachel Reeves last week – on monetary policy and the inflation outlook. After the budget announcement, the Office for Business Responsibility (OBR) said that the announced fiscal measures are both pro-growth and inflationary.

Technical Analysis: Pound Sterling wobbles near 1.2950

The Pound Sterling trades sideways against the US Dollar near 1.2950. The GBP/USD pair consolidates inside Monday’s range ahead of the opening of the polls in the US. The near-term trend of the GBP/USD pair remains bearish as it stays below the 50-day EMA at 1.3060 but has found a cushion near the 200-day EMA around 1.2850.

The pair struggles to hold near the lower boundary of the rising channel formation on the daily time frame. A decisive break below this boundary could trigger further declines.

The 14-day Relative Strength Index (RSI) holds above 40.00, signaling a buying interest at lower levels.

Looking down, the round-level support of 1.2800 will be a major cushion for Pound Sterling bulls. On the upside, the Cable will face resistance near the 50-day EMA around 1.3060.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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