GBP/USD picks up to 1.3180 with UK fiscal concerns still weighing

The Pound hits session highs at 1.3180 against the US Dollar but remains trapped within previous ranges.
Investors' concerns about UK's public finances and hopes of BoE rate cuts keep Pound bulls in check.
Markets remain wary of risk with all eyes on the release of delayed US macroeconomic data.

Guillermo Alcala FXStreet

The Pound has bounced up from session lows near 1.3135, to hit session highs near 1.3180, but remains moving within previous ranges, extending the choppy and sideways trading seen over the last few weeks. Ongoing concerns about the UK’s public finances and hopes of BoE interest rate cuts are keeping GBP bulls in check

The pair whipsawed last week, following news that Prime Minister Keis starmer and Chancellor Rachel Reeves made a U-turn on their plans to increase the income tax at the November 26 budget. The news provides some relief to taxpayers but raises doubts about how to cover the country's expected fiscal deficit.

Weak UK data boost BoE cut hopes

On the macroeconomic front, things have not been much better. Preliminary Gross Domestic Product data released last week showed that the economy contracted against expectations in the third quarter, with manufacturing and industrial production slumping.

These figures have boosted investors’ expectations that the Bank of England will be forced to cut its benchmark interest rate further in the coming months, probably as soon as December.

In the US, the federal government’s reopening will allow for the release of a stream of delayed US data this week, with a special interest in September’s Nonfarm Payrolls report, scheduled for next Thursday. In the meantime, a cautious market coupled with dwindling hopes of a Fed rate cut in December has been providing some support to the US Dollar.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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