UK Budget and a Fed decision come next for a Pound off its high

GBP/USD falls from the October 22 five-week high to just under 1.3350.
Traders buy back Dollars before the Fed, and the Pound is flat against the Euro.
Chancellor Healey presents his Budget Wednesday, and US PCE is due Thursday.

Joshua Gibson FXStreet

The Pound was flat against the Euro on Monday, so GBP/USD's drop came from traders buying back Dollars before Wednesday's Federal Open Market Committee (FOMC) decision. It fell below 1.3350 to its lowest since the October 20 jobs data and ended just under that level, after three sessions above it.

Traders who had bet against the Dollar bought some back before the Fed, which is expected to hold after raising rates in September. EUR/USD fell by almost exactly as much as GBP/USD, which left EUR/GBP flat and puts the whole move on the Dollar side of GBP/USD.

The Times reported that Chancellor Healey plans to raise the minimum wage for over-21s by about 3.9%, to around £13.20. That's two-tenths faster than the 3.7% rise in pay excluding bonuses, the figure at the centre of the case for a Bank of England (BoE) hike on November 5. GBP/USD rose on the next two five-minute bars.

On the calendar

Chancellor Healey presents his first Budget on Wednesday, with the Debt Management Office's plan for gilt sales published alongside it. It comes eight days before the BoE's November 5 decision, where traders put a quarter-point hike in the UK's Bank Rate from 3.75% close to fully priced.

The Fed's decision is due on Wednesday at 18:00 GMT, and futures put a hold from 3.75%-4.00% near 90% and a December hike near 80%. The first estimate of US third-quarter Gross Domestic Product (GDP) and September's Personal Consumption Expenditures Price Index (PCE) follow on Thursday at 12:30 GMT, and both feed the December odds.

On the charts

The October 22 high just above 1.3400 came on a test of the 200-day Exponential Moving Average (EMA) at about the same level. Monday's drop took GBP/USD back under its 50-day EMA, and the fall from that high is about a third of the climb from the October 14 low near 1.3150. Daily momentum is cooling from overbought.

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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