Pound Sterling Hampered by US Election Jitters, GBP/USD Close to 2-Month Lows

October 23, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Hampered by US Election Jitters, GBP/USD Close to 2-Month Lows

The dollar has maintained a strong tone in global markets amid a further increase in US bond yields with weaker UK equities also a negative factor.

The Pound to Dollar (GBP/USD) exchange rate remained on the defensive, traded around 1.2990 and near 2-month lows.

According to UoB; “The likelihood of GBP breaking clearly below 1.2940 will remain intact, provided that the ‘strong resistance’ level at 1.3060 is not breached in the next couple of days.”

The 10-year yield has increased to around 4.25% and close to 3-month highs. There are still strong expectations that the Fed will cut interest rates by 25 basis points at the November meeting, but confidence in a further cut in December has faded further.

Political factors are also having a growing impact on sentiment.

ING commented; “Our perception is that the size of the bond and FX moves are now being exacerbated by some deleveraging ahead of the US election. The path should be a stronger dollar if FX liquidity conditions indeed worsen into 5 November.”

MUFG commented on Trump; “His campaign proposals to raise tariffs, maintain loose fiscal policy and tighten immigration are all viewed as inflationary for the US economy which would curtail the Fed’s room to keep lowering rates in the coming years if implemented.”

It added; “As a result we would expect the US dollar and yields to continue moving higher heading into year-end if Donald Trump wins the US election. A Trump victory is still far from fully priced in leaving plenty of room for further upside.”

Domestically, the UK government borrowing requirement increased to £16.6bn for September from £14.5bn the previous year and the third-highest September deficit on record.

For the first six months of fiscal 2024/25, the borrowing requirement increased to £79.6bn from £78.4bn the previous year.

ONS deputy director for public sector finances Jessica Barnaby commented; “While tax revenue increased, this was outweighed by increased spending, partly due to higher debt interest and public sector pay rises.”

According to Alex Kerr, UK economist at Capital Economics commented on the data; “they do highlight the limited scope the Chancellor has to increase day-to-day spending without raising taxes.”

He added; “That said, if she tweaks her fiscal rules, she will still have room to raise public investment.”

As far as monetary policy is concerned, Bank of England rhetoric will remain under scrutiny.

In comments on Monday, MPC member Greene noted a high degree of uncertainty over consumer spending. According to Greene; "Given these risks, I believe a cautious, gradual approach to monetary easing is appropriate.”

Markets will monitor Tuesday’s comments from Governor Bailey very closely with some potential Pound selling if Bailey maintains a more dovish stance. The Pound will, however, spike higher if Bailey rows back from comments earlier in October.

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TAGS: Pound Dollar Forecasts