Pound Sterling trades flat against US Dollar ahead of US ISM Manufacturing PMI
- The Pound Sterling ticks lower against its major currency peers at the start of the week.
- UK Chancellor Reeves announces tax hike of up to 26 billion pounds by 2029-30.
- The Fed is expected to cut interest rates in its monetary policy meeting next week.
The Pound Sterling (GBP) flattens around 1.3230 against the US Dollar (USD), weakens against other currency pairs, during the European trading session on Monday. The GBP/USD pair consolidates while the US Dollar falls further amid firm expectations that the Federal Reserve (Fed) will cut interest rates in its monetary policy announcement next week.
During European trading hours, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh two-week low near 99.30.
The CME FedWatch tool shows that the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in December is 87.5%.
Fed dovish speculation has remained intensified due to weakness in the US labour market, and expectations that the impact of tariffs on inflation remains limited.
Daily digest market movers: Investors await ISM PMI, ADP Employment Change data
- The Pound Sterling trades lower against its major currency peers at the start of the week. The British currency has come under pressure as traders are increasingly confident that the Bank of England (BoE) will cut interest rates in its last monetary policy announcement of this year on December 18.
- Investors expect the BoE to cut interest rates by 25 basis points (bps) to 3.75% as the latest United Kingdom (UK) data showed signs of further weakness in job growth and slowing inflation growth.
- In addition to dovish BoE expectations, cooling gilt yields, following the announcement of fresh tax hikes by Chancellor of the Exchequer Rachel Reeves in the Autumn budget report, released last Wednesday, are also expected to cap the Pound Sterling’s upside. 10-year UK gilt yields are down almost 4% to near 4.44% from the November high of 4.62%.
- In the budget report, Reeves announced that the government will raise taxes by 26 billion pounds by 2029-30 to fill the fiscal gap. Moody’s rating agency has acknowledged the Labour Party’s efforts to reduce the debt, while warning that “execution risks” remain intact. "While the government’s willingness to bring public finances back in line with its targets is positive, execution risks remain high," Moody’s said.
- This week, the GBP/USD pair will be influenced by a slew of United States (US) data, notably the ADP Employment Change for November, which will be released on Wednesday.
- The ADP Employment Change data will indicate the current status of labour demand in the private sector. Economists expect the private sector to have added fresh 20K workers in November, lower than the 42K hired in October.
- In Monday’s session, investors will pay attention to the US ISM Manufacturing Purchasing Managers’ Index (PMI) figure for November, which will be published at 15:00 GMT. The agency is expected to report that the Manufacturing PMI contracted at a faster pace to 48.6 from 48.7 in October.
Technical Analysis: GBP/USD turns bullish after Doubble Bottom formation
On the daily chart, GBP/USD trades flat at 1.3224 and is expected to attract significant bids as a breakout of a Double Bottom formation has set a bullish reversal. However, the 200-day Exponential Moving Average (EMA) near 1.3265 continues to act as a key barrier for the Pound Sterling bulls.
The Relative Strength Index (RSI) at 52.75 is neutral-to-bullish, reflecting a steady recovery in momentum.
Looking up, the Cable could strengthen if it decisively breaks above the 200-day EMA. Such a scenario could lead the pair towards the October 28 high around 1.3370. On the downside, the November 21 low around 1.3040 will remain a key support level for the pair.
(The technical analysis of this story was written with the help of an AI tool.)
BoE FAQs
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).
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.
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.
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
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
