GBP/USD rises to near 1.3200 ahead of UK Autumn Budget

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GBP/USD continues its winning streak for the fifth consecutive day, trading around 1.3190 during the Asian hours on Wednesday. Traders await the UK Chancellor of the Exchequer, Rachel Reeves, to deliver the Autumn Budget later in the day.

GBP/USD rises ahead of the UK Autumn Budget due later on Wednesday.
The US Dollar struggles as softer data reinforce the likelihood of a Fed rate cut in December.
CME FedWatch Tool indicates pricing in more than 84% odds of a 25-basis-point Fed rate cut in December.

The British Finance Minister Rachel Reeves is expected to unveil tens of billions of pounds in new tax hikes, a budget that will test her credibility with both bond investors and lawmakers pushing for increased welfare spending. A more responsible fiscal stance can strengthen long-term confidence in UK assets, offering mild support to the Pound Sterling (GBP).

Just over a year after implementing £40 billion ($52.7 billion) in tax increases, the largest since the 1990s, and billed as a one-off. Reeves is now compelled to pursue additional revenue-raising measures amid a likely downgrade to Britain’s economic outlook and rising debt-servicing costs.

UK softer inflation eased to 3.6% in October and strengthened expectations of a Bank of England (BoE) rate cut. Markets now assign an 80% probability of a 25-bp cut in December, pushing gilt yields lower ahead of the budget.

The GBP/USD pair also gains as the US Dollar (USD) struggles, with softer United States (US) economic data boosting expectations of a Federal Reserve (Fed) rate cut in December. The CME FedWatch Tool suggests that markets are now pricing in more than 84% odds that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, up from 50% probability that markets priced a week ago.

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.