The Pound Sterling (GBP) continues to underperform its major currency peers on Friday as financial market participants expect the United Kingdom (UK) Chancellor of the Exchequer Rachel Reeves to raise taxes in the Autumn Statement again to address its ballooning fiscal debt, which is scheduled for late November.
Investors worry that the announcement of fresh taxes, either on individuals’ wealth or a further increase in employers’ contribution to social security schemes, or a combination of both, would dampen the overall sentiment of households.
The increase in employers’ contribution to National Insurance (NI) to 15% from 13.8% announced in the last budget resulted in a sharp slowdown in the labour demand. Business owners reduced their labour force to offset the impact of increased employment costs.
An increase in tax burden on households or employers by the UK Labour government will raise questions over its credibility, after promising voters before the election not to raise taxes.
In a speech on Thusday, Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann argued in favour of maintaining a restrictive monetary policy stance for longer, citing that the central bank still needs to address upside inflation risks. “The evidence from consumer behaviour is that we are not there yet,” Mann said.
Going forward, investors will focus on the UK employment data for the three months ending in August, which will be released on Tuesday.
Pound Sterling struggles to stabilize against US Dollar despite dovish Fed remarks
- The Pound Sterling strives to gain ground against the US Dollar (USD) during Friday’s European trading session after posting a fresh two-month low around 1.3280 earlier in the day. The outlook of the GBP/USD pair remains vulnerable as the US Dollar trades firmly, with an increase in its safe-haven demand following political developments in Japan and France.
- At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near a fresh two-month high of 99.56 posted on Thursday.
- However, financial market participants remain cautious over the US Dollar’s outlook in the wake of firm expectations that the Federal Reserve (Fed) will cut interest rates again in both monetary policy meetings remaining this year.
- According to the CME FedWatch tool, traders see an 81.5% chance that the Fed will cut interest rates by 50 basis points (bps) to 3.50%-3.75% by the year-end.
- On Thursday, Federal Open Market Committee (FOMC) members, New York Fed President John Williams and San Francisco Fed President Mary Daly, cited that the current monetary policy stance is restrictive and the Fed needs to cut rates further this year amid deteriorating labor market conditions. On the contrary, Fed Governor Michael Barr expressed caution about further rate cuts as inflation is unlikely to return to the central bank’s target of 2% in the next two years.
- In Friday’s session, investors will focus on the preliminary Michigan Consumer Sentiment Index and Consumer Inflation Expectations data for October, which will be published at 14:00 GMT.
Technical Analysis: Pound Sterling sees more downside towards 1.3140
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The Pound Sterling extends its downside to near 1.3300 against the US Dollar on Friday, the lowest level seen in a month. The overall trend of the GBP/USD pair has become uncertain as it drops to near the 200-day Exponential Moving Average (EMA), which trades around 1.3280.
The 14-day Relative Strength Index (RSI) slides below 40.00, suggesting the onset of a fresh bearish momentum.
Looking down, the August 1 low of 1.3140 will act as a key support zone. On the upside, the psychological level of 1.3500 will act as a key barrier.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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