The Pound Sterling is losing ground primarily due to UK economic uncertainty. If UK Prime Minister Keir Starmer succeeds in winning lower interest rates, that would have a substantially positive impact on the currency’s value. The Pound is the fourth most traded currency in the $6 trillion global foreign exchange market. Despite this, it still only accounts for roughly 12% of all transactions, and an astounding $630 billion on average per day as of 2022. These positive steps forward play out against a landscape of deepening manufacturing recession in the UK. Looking ahead, economic policymakers are right to take a wait and see approach.
Similarly, the Pound’s most referenced trading pairs, GBP/USD, or “Cable” as it’s known in the FX market, makes up around 11% of FX trades. GBP/JPY, called the “Dragon,” makes up 3% of FX activity, while the EUR/GBP pair – a combo of two of the world’s biggest currencies – makes up 2%. Traders are concerned by the long-term prospects of the Pound. This worry comes on the tail of intelligence from new Prime Minister Starmer and the Chancellor’s mini-budgetary designs.
Economic Indicators and Market Reaction
Latest figures show that the UK’s Manufacturers’ PMI fell to 48.2. This figure was below the projected 48.6 and down from 48.7 in October. This drop is a worrisome sign of a broad contraction in manufacturing — a key pillar of our economic fortitude. Given this, the promise of lower interest rates will have an even more debilitating effect on the Pound Sterling.
As of Tuesday morning within the European trading session, GBP/USD was hovering around 1.3211 from the daily timeframe. Looking at technicals, analysts point out that the 14-day Relative Strength Index (RSI) is at a neutral 51.24. If the 1.3085 provides a pullback, it could attract new buyers. That’s big-time support, and a daily close below this level could ruin any bullish mood. This would raise the threat of a much deeper retracement toward the big psychological level at 1.3000.
“The most important things that we can do for growth, the most important things that we can do for business is first to drive inflation down so that interest rates come down further, and the cost of business investment comes down with it.” – UK Prime Minister Keir Starmer
Fiscal Policies and Future Implications
Chancellor of the Exchequer Rachel Reeves responded with the pledge of an Autumn budget to ‘fill the black hole.’ Her budgetary plans include increasing taxes by £26 billion by the fiscal year 2029-30, given the great economic uncertainty signaled by those economic indicators. Seen as part of a larger strategy, this action represents an opportunity to stabilize the national economy. It could cause confusion over any future interest rate hikes.
Policymaker Megan Greene has indicated that she would only support interest rate cuts if there is significant deterioration in both the labor market and consumer spending. This very prudent position is an acknowledgement of the ongoing anxiety about inflation and the economy as a whole.
The US Dollar Index (DXY) is keeping its recovery round 99.40. Market traders are waiting to see what will be the effect value of this on general market sentiment toward the Pound. The interaction of positive domestic policy changes and negative global economic conditions has made for a tricky environment for British currency traders.
Market Outlook
Given the current economic landscape and policy discussions, market analysts remain vigilant about potential fluctuations in the value of the Pound Sterling. The talk of potential interest rate cuts creates downside risk for GBP/USD, especially if the recent weak trend in manufacturing data persists.
Looking at the 1.3085 level, traders seem to be excited with speculation surrounding future demand for GBP/USD. They need to be careful to avoid the unintended result of any persistent close under that level. These kinds of nonfundamental movements are sure to increase volatility and uncertainty in foreign exchange markets.