The British pound (GBP) attempted to rebound against the US dollar (USD) during European trading on Friday, following a dip to a two-month low near 1.3280 earlier in the day. The outlook for GBP/USD appears precarious, as interest in safe-haven currencies rises amid political instability in Japan and France, paired with a consistent upward trend for the US dollar.
At the moment, the US Dollar Index (DXY), which gauges the USD’s performance against six major currencies, remained high, nearing the two-month peak of 99.56 reached on Thursday.
Nevertheless, market players are approaching the dollar’s outlook with caution. There is a strong expectation that the Federal Reserve will implement further rate cuts during its two remaining meetings this year.
Traders are estimating an 81.5% likelihood that the Fed will reduce interest rates by 50 basis points, bringing them down to a range of 3.50-3.75% by year-end, as indicated by CME’s FedWatch tool.
On Thursday, remarks from New York Fed President John Williams and San Francisco Fed President Mary Daly — both part of the Federal Open Market Committee (FOMC) — emphasized that the current monetary policy is restrictive and further rate cuts are necessary due to worsening labor market conditions. In contrast, Fed Governor Michael Barr voiced concerns about additional cuts, suggesting it’s improbable that inflation will hit the central bank’s 2% target within the next two years.
For Friday’s trading session, investors are likely to pay close attention to the preliminary figures for Michigan Consumer Confidence and Consumer Inflation Expectations for October, set to be released at 2:00 GMT.
Pound under pressure as UK tax hikes loom
- Sterling has been struggling against major currencies on Friday, amid expectations that UK Chancellor of the Exchequer Rachel Reeves will announce further tax increases in her autumn statement, aimed at addressing the UK’s rising fiscal debt, which is due at the end of November.
- There are worries that introducing new taxes on personal assets or increasing employer contributions to social security, possibly both, could weaken overall household sentiment.
- The last budget’s increase in employer contributions to National Insurance (NI) from 13.8% to 15% has led to a notable decline in labor demand, prompting business owners to trim their workforce to counteract the heightened employment expenses.
- This potential increase in tax burdens could cast doubt on the credibility of Britain’s Labour government, which previously assured voters it wouldn’t raise taxes.
- On the same day, Bank of England (BoE) Monetary Policy Committee (MPC) member Katherine Mann suggested that central banks still need to tackle rising inflation risks and advocated for a sustained restrictive monetary policy. “What consumer behavior tells us is we’re not there yet,” Mann noted.
Attention will now shift to the UK jobs report for the three months leading to August, which is expected to be released on Tuesday.
Technical analysis: GBP nearing the 200-day EMA
On Friday, the pound sterling fell further against the US dollar, settling around 1.3300, which marks its lowest point in a month. The trend for the GBP/USD pair is quite uncertain, approaching the 200-day exponential moving average (EMA) near 1.3280.
The 14-day Relative Strength Index (RSI) has dipped below the 40.00 mark, indicating that a new bearish momentum may be emerging.
Support is likely to be found around the August 1st low of 1.3140, while the psychological barrier at 1.3500 may pose a challenge on the upside.
