The Pound Sterling has experienced ups and downs lately, trading as low as 1.3135 and peaking at 1.3180. There are ongoing worries about UK public finances and the possibility of interest rate cuts in the future. Last week, the Prime Minister and Chancellor decided not to raise income tax, which brought some relief to taxpayers but raised concerns about the national budget deficit. This change could influence future economic decisions, including actions from the Bank of England.

UK Economic Data

Recent figures show that the UK’s GDP contracted in the third quarter, mainly due to declines in manufacturing and industrial output. This news has led to rising expectations that the Bank of England will cut interest rates, possibly by December. In the US, the federal government’s reopening is set to release previously delayed economic data, including the nonfarm payroll numbers. Despite this, the likelihood of a Federal Reserve rate cut in December is fading, which has provided some support for the US Dollar. The Bank of England oversees the UK’s monetary policy with a target inflation rate of 2%. By adjusting interest rates, it affects the overall cost of credit in the economy, which in turn influences the value of the Pound. The Bank uses tools like Quantitative Easing and Tightening to respond to economic conditions, which also impacts the strength of the Pound. The Pound’s recent struggle to rise is a key warning sign for the weeks ahead. The UK economy is contracting, confirmed by last week’s reported Q3 GDP drop of -0.2%, alongside easing inflation, giving the Bank of England a chance to lower rates. Last week’s October CPI came in at 2.3%, reinforcing our belief that a rate cut is likely in December.

Market Uncertainty

The government’s sudden change on proposed income tax hikes before the November 26 budget is unsettling the market. This decision raises important questions about fiscal responsibility and how the deficit will be managed, reminding us of the market instability from late 2022. This uncertainty weighs heavily on the Pound, likely stifling any potential rallies. On the other hand, the US Dollar is gaining strength after the recent reopening of the government. The delayed Nonfarm Payrolls report from September confirmed a strong job gain of 210,000, followed by an even better October report showing 225,000 new jobs. This steady job growth suggests that the Federal Reserve will keep interest rates steady. The difference in central bank policies is now the main focus for the market. While the Bank of England seems ready to loosen monetary policy, the likelihood of a Fed rate cut in December has dropped significantly. The CME FedWatch tool indicates less than a 15% chance of a cut. This widening gap in interest rate expectations between the UK and the US is bearish for the GBP/USD pair. Given this situation, we believe traders should consider strategies that profit from a downturn of the Pound against the Dollar. This could include buying GBP/USD put options for protection against declines or directly selling futures contracts while aiming for a break below the recent support level of 1.3135. Increased volatility is expected as we approach the Bank of England’s December meeting, which could create opportunities for those betting on a weaker Pound. Create your live VT Markets account and start trading now.

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