British Pound weakens to near 1.3400 ahead of US midterm elections

The GBP/USD pair loses ground to near 1.3405, snapping the four-day winning streak during the early Asian trading hours on Tuesday. Markets might turn cautious ahead of a week full of catalysts, including the US midterm elections, the Bank of England (BoE) interest rate decision, and US September jobs data.

US midterm elections raise the prospect of a broader narrative swing back to inflation and deficit woes. Traders will gauge how the election outcomes will shape the market outlook. Current forecasts point to Democrats winning the House, with control of the Senate less clear.

Economists from Reuters see that if Democrats gain control of both the House and Senate, investors anticipate stricter regulation and oversight of Artificial Intelligence (AI), potentially weighing on financial markets.

If Democrats take the House while Republicans retain control of the Senate, the impact on the US fiscal outlook is likely to be mixed. Meanwhile, if Republicans sweep, investors expect the administration may introduce further tax reforms or increase defense expenditure, potentially widening the country's already substantial budget deficit.

Economists polled by Reuters expect the ‌BoE to raise the Bank Rate to 4.0% from 3.75% at its November policy meeting on Thursday. This would be its first hike since August 2023, when inflation was still more than the BoE’s 2% target. Traders will closely monitor the press conference for more clues about the UK interest rate outlook. Any hawkish comments from the BoE Governor Andrew Bailey could provide some support to the British Pound (GBP) against the US Dollar (USD).

BoE seen kicking off tightening cycle but guidance may cap Pound gains

Strategists at Brown Brothers Harriman note that the upcoming Bank of England policy decision and Monetary Policy Report on Thursday are widely expected to mark the start of a new tightening phase, with the BoE “widely expected to start tightening with a 25bps hike to 4.00% after standing pat all year.” They point out that “firmer UK inflation and economic activity back the move,” and anticipate a “vote split…seen at 7-2 with doves Alan Taylor and Swati Dhingra supporting a hold.”

However, BBH cautions that “BoE guidance and the updated MPR will test market expectations for 100bps of tightening over the next twelve months.” In their view, “persistent spare capacity across the forecast horizon would strengthen the case for pricing out hikes and limit GBP upside,” suggesting that while the initial move may be supportive for the Pound, the broader policy message could temper the market’s more aggressive rate path assumptions.

Logan flags more Fed hikes, keeping Dollar bulls in control

Fed’s Logan delivers a distinctly hawkish message, with an FXS Speechtracker score of 8/10, slightly above the 7.7/10 historical average and signaling a firmer stance relative to the established baseline. The insistence that the Fed “needs at least two more quarter-point rate hikes” and that skipping a meeting does not change the policy destination, combined with strong growth, solid consumer spending and a balanced-to-tightening labor market, underscores a commitment to making policy “modestly restrictive” until inflation is clearly headed back to 2%. Emphasis on gradual adjustment and clear communication suggests a preference for steady tightening that allows households, businesses and investors to adapt, reinforcing a supportive backdrop for the Dollar.

The FXS Fed Sentiment Index rose by 0.95 points to 143.62, firmly in hawkish territory and consistent with the above-baseline FXS Speechtracker score. This move higher in the FXS Fed Sentiment Index confirms that markets are interpreting Logan’s remarks as signaling further policy work ahead, a backdrop that typically underpins the Dollar against the Euro and Yen.

Technical Analysis: GBP/USD retains a positibe tone above the 100-day SMA

In the daily chart, GBP/USD holds a bullish near-term bias as spot remains above both the 20-period Bollinger middle band and the 100-day simple moving average (SMA). Price is pressing into the upper half of the Bollinger envelope, while the Relative Strength Index (14) at about 58 suggests constructive, but not overbought, momentum, hinting that buyers retain control as long as the pair stays anchored above the key moving average supports.

On the topside, immediate resistance aligns with the upper Bollinger band near 1.3465, where gains could pause or correct if buying pressure fades. On the downside, initial support is seen at the 100-day SMA around 1.3385, followed by the Bollinger middle band near 1.3318, while a deeper pullback would likely be contained ahead of the lower Bollinger band around 1.3175.

(The technical analysis of this story was written with the help of an AI tool. Know more.)