The Pound Sterling increased this week, thanks to relief from the UK Autumn Statement and general weakness of the US dollar. This pushed the GBP/USD exchange rate above 1.3275. The UK Budget helped calm fears in the gilt market while allowing more fiscal flexibility. However, the outlook for future rate cuts by the Bank of England remains mixed due to lower inflation and a struggling labor market.

The Impact Of The Autumn Statement

The pound gained early in the week after a relief rally following the Autumn Statement. The drop in the US dollar raised the GBP/USD pair to a recent peak of 1.3275, while the EUR/GBP remained below 0.8800, below the mid-November high of 0.8865. No major surprises in the UK Budget helped stabilize the gilt market, creating over £20 billion in fiscal headroom. However, tax increases are expected around the next election, while spending will occur sooner. The lack of immediate fiscal tightening doesn’t lead the Bank of England to cut rates more now, but future plans could decrease inflation, allowing for cuts later. Nonetheless, weaknesses in the labor market and falling inflation may still prompt the Bank of England to consider rate cuts soon. The pound gained in the wake of the Autumn Statement, taking GBP/USD above 1.2800. The weaker US dollar supported this rise, but details from the UK budget suggest that this strength may be temporary. Government spending is being prioritized now, while tax hikes are scheduled for later.

The Future Outlook

This fiscal situation presents a mixed picture for the Bank of England, but the struggling economy is the key factor. Recent data shows quarterly GDP growth slowing to just 0.1% and the unemployment rate rising to 4.5%. This increases the pressure to support the economy. Additionally, with CPI inflation falling to 2.1%, close to the Bank’s target, they have some room to act. For traders, the recent strength of the sterling is an opportunity to prepare for a decline. We expect the Bank of England to signal a rate cut soon, which likely would weaken the pound. Therefore, considering put options on GBP/USD might be a smart way to benefit from a potential drop back to earlier lows. This situation also impacts other currency pairs, as EUR/GBP could rise if the pound weakens. We recall the strong market responses to fiscal policy announcements back in 2022, highlighting that uncertainty remains a major theme. This environment suggests that, even with a clear direction, volatility might be high, making options helpful for managing risk. Create your live VT Markets account and start trading now.

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