GBP/USD bulls struggle as UK tax plans and weak data weigh

GBP/USD saw fresh downside challenges on Thursday.
Despite being long overdue for a bullish rebound, Cable bulls are unable to catch a break.
UK PM Starmer is poised to waive off planned tax increases.

Joshua Gibson FXStreet

GBP/USD caught a brief bullish slant to Thursday’s trading window, with Cable traders brushing off a worse-than-expected Gross Domestic Product (GDP) growth print from the third quarter. However, late-day flows turned sour after reports broke that UK Prime Minister Keir Starmer is poised to cancel a batch of planned tax increases intended to help bolster the UK’s questionable financial position.

With the US government set to reopen, at least temporarily, markets are now looking ahead to the resumption of critical economic dataset releases. US White House officials toyed with the idea of declaring entire batches of inflation and growth data as “lost” during the government closure, specifically the October inflation and employment figures, which could never be released. A critical gap in key inflation and labor information is a prospect that is likely sitting poorly with investors who are eager to try and draw a bead on the chances of a third straight interest rate cut from the Federal Reserve (Fed) on December 10.

Despite a potential gap in the October data, September’s Nonfarm Payrolls (NFP) jobs report is rumored to be getting prepared for a late release next week, and will serve as one of the last chances for the Fed to take a dipstick measurement of the US economy before its next interest rate decision. According to the CME’s FedWatch Tool, rate traders are pricing in slightly less than 50% odds of a quarter-point rate cut in December, with around 90% odds that the Fed will blink and wait until January 28, 2026, before giving a third 25 basis point cut.

GBP/USD daily chart

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.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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