The GBP/USD pair continues to trade defensively around 1.2895 during the early Asian trading hours on Friday, marking its lowest level since August 16. This decline follows the UK Labour government’s announcement of its first Autumn Forecast Statement on Wednesday, which has contributed to increased uncertainty around the Pound Sterling (GBP).
The pressure on the GBP can be attributed to several factors, including recent US economic data. The latest figures from the US Bureau of Economic Analysis (BEA) indicated that the Personal Consumption Expenditure (PCE) Price Index, a key measure of inflation, grew at a slightly faster-than-expected pace in September. The headline PCE rose 2.1% year-over-year, down from 2.2% in August but in line with market expectations. Meanwhile, the core PCE, which excludes the volatile food and energy sectors, increased by 2.7%, matching the August rise and surpassing the forecast of 2.6%.
Market expectations for the Federal Reserve’s monetary policy are being shaped by these inflation figures, with the CME FedWatch tool indicating a strong likelihood of a 25 basis point interest rate cut in both November and December policy meetings.
As traders await the release of the US Nonfarm Payrolls (NFP) data for October, anticipated to show an addition of 113,000 jobs and an unchanged unemployment rate of 4.1%, market sentiment remains cautious. A stronger-than-expected NFP report could reinforce the case for maintaining or even tightening monetary policy, which may further weigh on the GBP.
On the UK side, the new Labour government’s first budget has introduced significant tax increases totaling £40 billion to address public finance challenges and support investments in public services. Furthermore, the UK’s Office for Business Responsibility (OCR) has revised its 2024 inflation forecast upwards to 2.5%, up from an earlier estimate of 2.2% made in March. This adjustment has led traders to anticipate fewer interest rate reductions by the Bank of England (BoE), potentially limiting the downside for the GBP.
In summary, while GBP/USD remains under pressure, the combination of the UK government’s fiscal measures and the shifting expectations around US monetary policy creates a complex backdrop for the currency pair as it navigates these economic developments.
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