At a Glance
- GBP/USD fell over 0.35% on Wednesday, trading below 1.3250.
- This decline is attributed to rising expectations for a Bank of England rate cut and anticipation of the Federal Reserve’s monetary policy decision.
- Soft UK economic data, including a weakening labor market and unchanged inflation, alongside fiscal concerns, are weighing on Sterling.
- Technically, a break below the 200-day SMA suggests further downside risk for GBP/USD.
GBP/USD Declines Amidst Central Bank Uncertainty
The GBP/USD currency pair experienced a significant drop of over 0.35% on Wednesday, pushing the exchange rate below the 1.3250 level. This downward movement is largely influenced by increasing speculation surrounding a potential rate cut by the Bank of England (BoE) at its upcoming November meeting. Concurrently, market participants are closely awaiting the monetary policy announcement from the Federal Reserve (Fed) in the United States.
At the time of reporting, the GBP/USD pair was trading at 1.3219. Sellers have successfully driven the spot price below the 200-day Simple Moving Average (SMA), a key technical indicator located at 1.3237, signaling a bearish sentiment in the short term.
Sterling Weakens on Soft UK Data and Fiscal Concerns
Recent economic data from the United Kingdom has painted a picture of a cooling economy. Labor market indicators suggest a softening trend, while inflation remained static at 3.8% in September. Adding to the pressure on the Sterling, a report by the Financial Times indicated that Chancellor Rachel Reeves might confront a substantial £20 billion reduction in public finances due to downward revisions in productivity forecasts by the Office for Budget Responsibility (OBR).
💡 Market participants had largely priced in a 74% probability of a rate cut by the Bank of England in December, according to insights from the LSEG central bank interest rate probability tool.
Meanwhile, across the Atlantic, traders were anticipating a 25-basis-point rate cut by the Fed later in the day. However, uncertainties are mounting regarding the clarity of messaging from Fed Chair Jerome Powell, particularly given the scarcity of recent economic data due to the ongoing government shutdown.
GBP/USD Price Forecast: Technical Outlook
The current technical landscape suggests a potential for further declines in the GBP/USD pair. A daily close below the 200-day SMA could indeed trigger a test of the August 1 swing low at 1.3141, with a subsequent level of interest being the 1.3100 mark. Should the downward momentum persist, the next significant cycle low to watch would be the April 7 low at 1.2707.
Conversely, a decisive move by GBP/USD to reclaim the 1.3300 level could open the door for a retest of the 20-day SMA, currently situated at 1.3367, and potentially the 1.3400 psychological barrier.
(Note: This information was updated on October 29 at 16:04 GMT to reflect that UK inflation remained unchanged at 3.8% in September, contrary to an earlier report of easing.)
Pound Sterling FAQs
What is the Pound Sterling?
The Pound Sterling (GBP), established in 886 AD, is the world’s oldest currency and serves as the official currency of the United Kingdom. It holds the distinction of being the fourth most traded currency globally in the foreign exchange (FX) market, representing 12% of all transactions and averaging $630 billion daily, according to 2022 data. Its primary trading pairs include GBP/USD (known as ‘Cable’), which constitutes 11% of FX volume, GBP/JPY (‘Dragon’ among traders) at 3%, and EUR/GBP at 2%. The Bank of England (BoE) is responsible for issuing the Pound Sterling.
How do the decisions of the Bank of England impact on the Pound Sterling?
Monetary policy decisions made by the Bank of England are the most significant driver of the Pound Sterling’s value. The BoE’s principal objective is to maintain price stability, defined as an inflation rate consistently around 2%. The BoE primarily uses interest rate adjustments as its tool to achieve this goal. When inflation is excessively high, the BoE typically raises interest rates to curb borrowing costs, which generally benefits the GBP by making the UK a more attractive destination for international investors. Conversely, if inflation falls below the target, signaling a slowdown in economic growth, the BoE may consider lowering interest rates to stimulate borrowing and investment, thereby supporting economic expansion.
How does economic data influence the value of the Pound?
Economic data releases provide crucial insights into the health of an economy and can directly influence the Pound Sterling’s value. Key indicators such as Gross Domestic Product (GDP), Purchasing Managers’ Indexes (PMIs) for manufacturing and services, and employment figures all play a role in shaping the GBP’s direction. A robust economy typically strengthens the Pound, attracting greater foreign investment and potentially prompting the BoE to increase interest rates. Conversely, weak economic data often leads to a depreciation of the Pound Sterling.
How does the Trade Balance impact the Pound?
The Trade Balance is another critical data point for the Pound Sterling. This metric measures the difference between a country’s export earnings and its import expenditures over a specific period. If a nation’s exports are in high demand globally, the resultant increase in demand for its currency from foreign buyers seeking to acquire these goods can strengthen the GBP. Therefore, a positive net Trade Balance typically bolsters a currency’s value, while a negative balance tends to weaken it.
Expert Summary
The GBP/USD pair has fallen below the 1.3250 level due to increased expectations of a Bank of England rate cut and anticipation of the Federal Reserve’s policy decision. Soft UK economic data and fiscal concerns are contributing factors to Sterling’s weakness. Technically, a break below the 200-day SMA suggests further downside potential for the pair.